Introduction – The Queen v Cheema
On February 27, 2018, a majority of the Federal Court of Appeal overturned the Tax Court of Canada and decided that a new-home purchaser cannot claim the GST/HST New Housing Rebate if a co-signer of the purchase agreement doesn’t satisfy the rebate conditions—even if the co-signer held title as a bare trustee for the purchaser’s benefit.
This decision—Her Majesty the Queen v Mohammad N. Cheema, 2018 FCA 45—stands in sharp contrast to the treatment of bare trusts in Canadian tax law, which generally considers such a trust a non-entity for tax purposes.
After explaining both the requirements of the GST/HST New Housing Rebate and the nature of a bare trust, this article explores the decision of the Tax Court of Canada in Cheema v the Queen (2016 TCC 251) and the decision of the Federal Court of Appeal in the Queen v Cheema (2018 FCA 45).
The GST/HST New Housing Rebate Under 254(2) of the Excise Tax Act
Section 256.1 of Canada’s Excise Tax Act (along with the provincial regulations) provides a new housing rebate of up to $24,000 for a residential complex in Ontario. In Ontario, the rebate’s availability does not depend on the value of the home. The federal rebate, however, is available only if the fair market value of the newly built or substantially renovated home is $450,000 or less.
Subsection 254(2) of the Excise Tax Act sets out the prerequisites for receiving the new housing rebate. In sum, all of these conditions must be satisfied for the purchaser to receive the new housing rebate:
- A builder of a home or condo “makes a taxable supply” by selling the home or condo to a “particular individual.”
- The particular individual is acquiring the home or condo as his or her “primary place of residence” (or the primary place of residence of his or her relative or spouse). Moreover, the particular individual must acquire the home or condo as a primary place of residence “at the time the particular individual becomes liable or assumes liability under an agreement of purchase and sale.”
- The particular individual “has paid all tax [i.e., GST/HST] payable” for purchasing the new home or condo.
- Ownership of the home or condo is transferred to the particular individual after the home or condo’s construction or substantial renovation.
- The particular individual (or his or her relative or spouse) was the first individual to occupy the home or condo as a place of residence after its construction or substantial renovation. And if there is more than one particular individual, all of them as a group must satisfy the occupancy requirements (subsection 262(3) of the Excise Tax Act).
What Is a Bare Trust?
Equity, a body of law developed in the English Court of Chancery and adopted by Canadian common law, distinguishes legal ownership from beneficial ownership. A person legally owns a property when his or her name is on title. The beneficial owner, in contrast, is “the real owner of property even though it is in someone else’s name”: Csak v Aumon (1990), 69 DLR (4th) 567 (Ont HCJ), at p. 570.
A trust depends upon this distinction between beneficial and legal ownership. A trust is a relationship between a trustee, a beneficiary, and a property: the trustee has legal ownership of the property; the beneficiary has beneficial ownership.
Typically, the creator or settlor of the trust will burden the trustee with some duty to maintain or manage the trust property in the beneficiary’s favour. For instance, the settlor might require the trustee to manage a large sum of money for a child beneficiary.
A bare trust, on the other hand, is a trust where the trustee holds property without any further duty other than to convey it to the beneficiary upon demand. In other words, the difference between a bare trust and an ordinary trust lies in the trustee’s power or discretion: “The distinguishing characteristic of the bare trust is that the trustee has no independent powers, discretions or responsibilities. His only responsibility is to carry out the instructions of his principals—the beneficiaries. If he does not have to accept instructions, if he has any significant independent powers or responsibilities, he is not a bare trustee”: Trident Holdings Ltd. v Danand Investments Ltd., 64 OR (2nd) 65 (Ont. CA).
Tax Treatment of the Bare Trust: A Non-Entity Akin to an Agent
Generally, tax law ignores a bare trust. Courts treat a bare trust as akin to an agency relationship. In an agency relationship, the agent deals with property on behalf of the principal. For tax purposes, however, the principal is considered to deal directly with the property. Likewise, in a bare trust, the beneficiary is treated as dealing directly with the trust property.
And, until the Federal Court of Appeal’s decision in Cheema, courts have faithfully ignored the legal interests of a bare trustee when determining the tax implications of a transaction. For instance, in De Mond Jr. v The Queen,  4 CTC 2007, Justice Lamarre (as she then was) explained that “[t]he existence of a bare trust will be disregarded for income tax purposes where the bare trustee holds property as a mere agent or for the beneficial owner.”
This view applies not only to income tax but also to transactions involving the Harmonized Sales Tax and Goods and Services Tax (HST/GST). That is, courts also ignore bare trusts when applying the provisions of the Excise Tax Act: S.E.R. Contracting Ltd. v The Queen, 2006 TCC 6 at para 12; City of Edmonton v The Queen, 2015 TCC 172 at para 56.
Granted, neither the Income Tax Act nor the Excise Tax Act define a “bare trust.” But subsection 104(1) of the Income Tax Act says that “a trust is deemed not to include an arrangement under which the trust can reasonably be considered to act as agent for all beneficiaries under the trust.” Commentators interpret this clause as Parliament’s way of confirming that the Income Tax Act’s trust provisions don’t apply to a bare trust.
The Voyage Home of Mohammad N. Cheema
Mr. Mohammad N. Cheema wished to purchase a newly built residential property. But he required help securing a mortgage. So, Mr. Cheema approached his friend, Dr. Akbari, for assistance. To this end, Mr. Cheema and Dr. Akbari both signed the agreement of purchase and sale with the builder.
Akbari signed the purchase agreement solely to assist Cheema obtain mortgage financing. The two of them understood that Akbari wouldn’t have any real interest in the property, pay any the house’s purchase price or expenses, or occupy the house as his primary residence.
On closing, Cheema and his spouse acquired an undivided 99% interest in the property, while Akbari acquired a 1% interest. The parties also signed a bare-trust agreement documenting the nature of their relationship. The agreement stated that
- Cheema and his spouse were the beneficial owners of the property,
- Akbari held his 1% interest in trust for the beneficial owners, and
- Akbari would convey his interest on demand.
The Canada Revenue Agency (CRA) denied the taxpayer’s new-housing rebate on the basis that Akbari neither acquired the property as his primary residence nor occupied the residence on closing.
Cheema appealed the CRA’s reassessment to the Tax Court of Canada.
The dispute—in both the Tax Court of Canada and the Federal Court of Appeal—turned on a single issue:
- Is an individual acquiring title as bare trustee a “particular individual” for the purposes of subsection 254(2) of the Excise Tax Act?
If so, the bare trustee must satisfy the GST/HST New Housing Rebate conditions. If not, only those acquiring beneficial ownership need to satisfy the GST/HST New Housing Rebate conditions.
The Tax Court’s Decision: Cheema v Her Majesty the Queen, 2016 TCC 251
Before the Tax Court of Canada, Cheema argued that Akbari wasn’t a “particular individual” for the purposes of subsection 254(2) of the Excise Tax Act because Akbari was a bare trustee. Thus, Akbari need not satisfy the prerequisites for the GST/HST New Housing Rebate. Moreover, Cheema claimed that he alone was the “particular individual” who needed to satisfy the conditions in subsection 254(2).
The Crown didn’t dispute the fact that Cheema and his spouse satisfied the rebate conditions. But the Crown contended that Akbari needed to satisfy those conditions as well. The Crown alleged that Akbari was a “particular individual” because he signed the agreement of purchase and sale. Since Akbari didn’t occupy the property, the rebate is unavailable.
The Tax Court of Canada allowed Cheema’s appeal, permitting the rebate. The court found, on the basis of the bare-trust agreement, that Akbari was a bare trustee. It reasoned that a bare trustee is not a “particular individual” and thus need not meet the conditions set out in subsection 254(2) of the Excise Tax Act. In addition, the court held that subsection 262(3), which requires more than one “particular individual” to each qualify for the rebate, does not bring a bare trustee into the scope of 254(2). The court summarized the law as follows:
For tax purposes, a bare trust is considered a non-entity in the sense that a beneficiary as principal, is considered to deal directly with property through the trustee as agent or nominee (para 54).
The Crown appealed the court’s decision to the Federal Court of Appeal.
The Federal Court of Appeal’s Decision: Her Majesty the Queen v Cheema, 2018 FCA 45
The Federal Court of Appeal rendered a split decision. Stratas J.A. delivered the majority opinion; Nadon J.A. concurred. Webb J.A., however, produced a forceful dissent.
The majority appellate court sided with the Crown. In sum, the majority reasoned that the Tax Court erred by relying on the bare-trust agreement when rendering its decision. Recall, the Tax Court held that Dr. Akbari wasn’t a “particular individual” that needed to meet the rebate conditions under subsection 254(2): Akbari signed the purchase agreement but only acquired legal title as a bare trustee; Cheema was the beneficial owner. But, according to the majority Federal Court of Appeal, subsection 254(2) doesn’t distinguish between beneficial and legal ownership; it requires every individual assuming legal liability to the builder under the purchase agreement to satisfy the rebate conditions. In his robust dissent, Webb J.A. concluded that Akbari wasn’t a “particular individual” that must satisfy the rebate conditions subsection 254(2) of the Excise Tax Act. Webb J.A. reasoned that a “particular individual” is one who acquires beneficial ownership of the new home or condo; it’s not the individual that simply signs the agreement of purchase and sale. Webb J.A. observed that the GST/HST New Housing Rebate was presumably meant to aid the beneficial owner of a newly built home. After all, the beneficial owner is generally the person who pays the GST/HST on the purchase. Moreover, the rebate scheme doesn’t provide a means of identifying the “particular individual” when individuals are removed from the agreement of purchase and sale. This void, Webb J.A. suggested, indicated that the rebate conditions focused on the individual who acquired beneficial ownership—not merely the one who assumed liability under the purchase agreement. Finally, Webb J.A. anticipated cases where the majority’s judgment may in fact preclude the CRA from denying the GST/HST New Housing Rebate on the basis that a non-occupant acquired beneficial ownership but didn’t appear on the purchase agreement (ibid at para 62):
There may also be situations where the Minister will want to determine whether the supply by way of sale was made to the person who is the beneficial owner. Assume that two individuals want to buy a condo – one as an investment (the investor) and the other as a place to live (the occupant). Assume that the investor is not a relation of the occupant for the purposes of section 254 of the ETA. Assume that the occupant is the only person who signs the agreement of purchase and sale as a purchaser and is the only person shown on the deed as a grantee. The occupant collects one-half of the amount of the purchase price from the investor and pays the full purchase price to the builder. The occupant signs a declaration of bare trust in favour of the investor, declaring that a fifty interest [sic] in the property is being held for the investor. The occupant occupies the condo as their primary place of residence. It would seem to me that the Minister would want to argue that transfer of legal title by the builder to the occupant would not be sufficient to make the occupant the only particular individual for the purposes of paragraph 254(2)(a) of the ETA.
Despite Webb J.A.’s cogent reasons, the majority Federal Court of Appeal held that a taxpayer cannot receive the GST/HST New Housing Rebate if an individual signed the purchase agreement as a bare trustee yet failed to satisfy the rebate conditions under section 254 of the Excise Tax Act.
Commentary – Bare Trusts and the New Housing Rebate
As hinted by Webb J.A.’s dissent, the majority’s holding opens up an investment opportunity involving the GST/HST New Housing Rebate that Parliament presumably did not intend.
Moreover, the appellate court’s decision leaves a couple questions unanswered. First, Cheema involved a relationship between a bare trustee, Akbari, and a beneficiary, Cheema. The appellate court’s reasoning in Cheema would or should apply to principal-agent relationships. Second, in Cheema, Mr. Cheema and Dr. Akbari both initially signed the agreement of purchase and sale. The dissent pointed out that the GST/HST rebate provisions don’t provide a mechanism for recognizing a “particular individual” when a buyer’s name is removed from the purchase agreement. And the majority court doesn’t explain whether such a revision would render the GST/HST rebate unavailable for the remaining purchaser.
Cheema demonstrates that, if you need a guarantor to qualify for a mortgage on a property otherwise eligible for the GST/HST New Housing Rebate, your guarantor should not sign the agreement of purchase and sale unless he or she meets the rebate criteria. If your intended guarantor doesn’t meet the rebate conditions, you should keep the guarantor’s name off title. Instead, your guarantor should only sign the mortgage agreement.
The Cheema case involved the GST/HST New Housing Rebate for purchasing a new home from a builder. But you can also receive the GST/HST New Housing Rebate for building a home on land that you own where the home will serve as your (or a relative’s) primary place of residence. Similarly, the GST/HST New Housing Rebate is also available if you substantially renovate your primary place of residence. The maximum Ontario new-housing-rebate amount for an owner-built house differs depending on whether you paid HST when you purchased the land: If you paid HST, the maximum rebate is $24,000; if you didn’t pay HST, the maximum rebate is $16,080.