GST/HST Pitfalls with Bare Trusts & Real Estate
This is the second in a series of posts on the Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) and real estate. Prior posts covered: the rules for collection of GST/HST on real estate, and GST/HST new housing rebates and investment real estate. Up next: joint ventures.
The Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) is generally premised on transactions between suppliers, who make supplies, and recipients, who acquire supplies. Suppliers are generally required to charge tax on taxable supplies (with notable exceptions, such as self-assessment on real estate by GST-registered recipients discussed here) while recipients may be eligible to claim input tax credits (“ITCs”) for supplies used in the course of commercial activities they are acquire if they met certain requirements.
Bare trusts are sometimes used to hold real estate (“real property” in GST parlance) and other property. However, they pose a number of challenges for GST/HST purposes because while trusts are deemed to be “persons” and can register in principle, bare trusts generally do not act in their right. For example, a bare trust is established to hold real property for commercial development and incurs GST/HST on real property. The trust is registered at the time of acquisition so it self-assesses tax and claims ITCs. However, the commercial activities are likely the beneficial owner’s and not the bare trust’s. As a result, only the beneficial owner is eligible for ITCs. The bare trust may have wrongly claimed ITCs belonging to the beneficial owner and is liable to assessment. The beneficial owner may be able to claim those ITCs if they are within the four-year limitation period and meet certain requirements (discussed below). If the bare trust has been collecting and remitting tax on supplies of, for example, commercial leases, the beneficial owner could technically still be assessed for failing to do so. As discussed in this case comment, there could be significant implications for the seller, who may have failed to collect tax on the assumption that the buyer was GST-registered.
Bare trusts can also be problematic in terms of exemptions that are based on the identity of the seller. For example, the so-called “vacant land” exemption requires, among other things, that the seller be an individual or personal trust. The sale by an individual as bare trustee or agent for a corporation or partnership likely would not qualify.
Simon Thang, LL.B, LL.M (Taxation) is Toronto tax lawyer practising exclusively in the areas of Canadian sales tax (GST/HST, PST), and customs and trade. He is the principal of Thang Tax Law.