A residential property is often the largest single purchase that an individual or family will ever make. To help defray some of the cost of Canadian home ownership, a new housing rebate is available under subsection 254(2) of the Excise Tax Act to enable those who qualify to obtain a rebate of GST/HST paid on the purchase of a new residential property.
One of the main requirements for claiming the rebate is outlined in paragraph 254(2)(b) of the ETA which states that to qualify for a NHR a “particular individual” must be acquiring a property for use as the primary place of residence of that particular individual or a family member of that particular individual, at the time of the agreement to buy the new residential property.
In the 2016 decision of Cheema v The Queen, 2016 TCC 251, the Tax Court of Canada held that based on the general principle that a bare trust is considered a non-entity for tax purposes, a guarantor that signs an agreement of purchase and sale as a bare trustee for the co-purchasers (who are the beneficial owners of the property) was not a “particular individual” and was thus not required to satisfy the intended residency requirements of paragraph 254(2)(b).
This TCC decision was, however, recently overturned by the Federal Court of Appeal in Cheema v. The Queen, 2018 FCA 45 where a majority of the court held that a bare trustee was a “particular individual” for the purposes of paragraph 254(2)(b), so a NHR will only be available if a bare trustee can satisfy the intended residency requirements.
The appellant in Cheema purchased a new residential property with the intention that he and his wife would live there. To assist with financing, the agreement of purchase and sale was co-signed by the appellant’s friend with the understanding that the friend would have no real interest in the property. In that regard, upon closing, the appellant and his friend entered into a written trust agreement that confirmed that the friend’s interest in the property was to be held in trust for the appellant and his wife as the beneficial owners of the property, and that this interest would be transferred on demand.
After the agreement of purchase and sale was entered into, the appellant applied for a NHR. The Canada Revenue Agency denied the rebate, taking the position that since the co-purchaser friend never intended to occupy the property as his primary residence, the appellant was ineligible for a NHR pursuant to paragraph 254(2)(b) of the ETA.
The appellant appealed the CRA’s decision to the TCC where he argued that the intended residency requirement in paragraph 254(2)(b) did not apply to the co-purchaser friend who only acquired legal title to the new residential property as a bare trustee of the appellant and his spouse, the beneficial owners.
The TCC judge distinguished legal and beneficial ownership and adopted the longstanding principle that a bare trust is considered a non-entity for tax purposes because the beneficial owner is treated as a principal dealing with the property through a bare trustee who is acting as its agent. On this basis, the TCC held that the reference to “particular individual” in subsection 254(2) of the ETA only applied to beneficial owners, such that the friend, as a bare trustee, was not required to have an intention to occupy the property as his permanent residence. The TCC therefore allowed the appeal and found that the appellant was entitled to the NHR.
On appeal to the FCA, the TCC’s finding of a bare trust was not challenged by the CRA, but the CRA did challenge the ultimate conclusion in the case. In a split 2-1 decision, a majority of the FCA overturned the TCC judge’s decision.
The FCA majority noted that section 40 of the New Harmonized Value-added Tax System Regulations, No. 2, SOR/2010-151 provides that if a supply of a new property is made to two or more individuals, the references to “a particular individual” are to be read as references to all of those individuals as a group. When section 40 of the Regulations was read together with subsection 254(2), the majority found that it was clear that pursuant to paragraph 254(2)(b) all purchasers of a new property must have the intention to use the property as a primary residence.
In dealing with the TCC’s conclusion that the friend should be disregarded as a mere bare trustee, the majority held that paragraph 254(2)(b) was worded in such a way that it did not matter that the friend only held a legal interest as a bare trustee:
94 … [Paragraph 254(2)(b)] speaks of the particular individual’s reason for acquiring the complex at the time that person “becomes liable or assumes liability under an agreement of purchase and sale of the complex.” It is the relationship of the person acquiring the complex to the builder—one of purchase and sale—that is relevant, not the relationship between co-purchasers.
The FCA majority therefore concluded that a bare trustee was a “particular individual” for the purposes of paragraph 254(2)(b) and that the TCC had erred by failing to base its decision on who was legally liable to the builder under the agreement of purchase and sale, which was the proper focus of this paragraph.
The single dissenting judge would have upheld the TCC decision on the basis that the bare trustee was not a “particular individual” for the purposes of subsection 254(2) of the ETA since he did not acquire a beneficial interest in the purchased property.
By way of commentary, the FCA’s decision in Cheema seems to be a clear departure from the general principle that the existence of a bare trust will be disregarded for tax purposes, as the bare trustee is generally a look-through for the beneficial owner of the property. While the definition of “particular individual” here may have weighed on the FCA’s decision, it is debatable whether the decision was correctly decided in our view.
In support of its decision, the FCA majority held that the existence of a bare trust was irrelevant based on the wording of paragraph 254(2)(b) which looks at the reason that a “particular individual” is acquiring a property at the time that person “becomes liable or assumes liability under an agreement of purchase and sale of the complex.” However, the problem with this argument is that it presupposes that a bare trustee is a “particular individual,” which would not be the case under the general principle that a bare trustee is a non-entity to be disregarded for tax purposes.
The majority decision also seems to be contrary to the purposes of the NHR which is to reduce the burden of purchasing a new residential property, which presumably means that the intended recipient of this rebate is the beneficial owner(s) of the property. On this basis, we tend to agree with the dissenting FCA judge who found that for this reason there was “…no apparent reason to depart from the general principle that bare trusts will be ignored for the purposes of the ETA.”
Hopefully this case will be confined to its facts (or to NHR cases), as it has the potential to create much uncertainty when it comes to how the GST/HST operates in the context of (what would have been historically considered look-through like) agents and bare trustees.
Robert G. Kreklewetz and Steven Raphael are with Millar Kreklewetz LLP, Toronto