A bare trust, also referred to as a naked trust, exists where a person, the trustee, is merely vested with the legal title to property and has no other duty to perform or responsibilities to carry out as trustee, in relation to the property vested in the trust.
The sole duty of a bare trustee would be to convey legal title to the trust property on demand of and according to the instructions of the beneficiary as provided for within the trust instrument. The bare trustee does not have any independent power, discretion or responsibility pertaining to the trust property. In such cases, the beneficial owner retains the right to control and direct the trustee in all matters relating to the trust property.
Therefore, a trust will not be a bare trust where the trustee has other duties set out in the trust instrument which involve independent or discretionary powers and responsibilities.
Bare trusts are often found in real estate transactions to defer the determination and/or severance of ownership up to time of possession, and in some instances, allow for some anonymity
In Universo Home Construction Ltd. v. The Queen, 2019 TCC87 the taxpayer claimed that it was the “builder” of a new home and was entitled to the assignment of a new housing rebate from the purchaser of the new home. The Excise Tax Act (Canada) (the “Act”) allows for a new housing rebate to be paid to a builder where the builder has agreed to pay or credit the new housing rebate to the purchaser of the new house. The sole issue before the Court was whether the taxpayer was a “builder”. If so, it was agreed by the parties that the taxpayer would be entitled to the rebate.
The legal title to the property was registered in the name of the spouse of the shareholder of the taxpayer. The spouse and the taxpayer entered into a Trust Declaration. The Crown contested the validity of the Trust Declaration and alleged that the taxpayer did not have any interest in the property to qualify it as a “builder” for the GST/HST rebate application. The Crown alleged that the Trust Declaration was unenforceable for several reasons: there were two versions of the Trust that made it unreliable evidence; it was more likely than not executed by the signatories after the acquisition date; and, in any event, the execution date could not be determined from the document or from other evidence. In general, The Crown contended there were not enough tangible legal steps or actions which, on balance, established a trust or the like. The absence of that evidence failed to establish Universo Homes was a builder entitled to the transferred Rebate under the Act.
The Court found in favor of the taxpayer and concluded that it was a “builder”, notwithstanding the questionable status of the Trust Declaration. The Court noted that it was the nebulous date of execution which caused the confusion; it was not the expressed effective date, or the stated existence of the certain certainties needed for a trust.
The Court found that there was significant evidence (other than the Trust Declaration) that was consistent with the taxpayer being the beneficial owner of the property even though it was not
registered on title. This evidence included:
• throughout the period of ownership, the taxpayer’s financial statements reflected its acquisition of the land, the materials, and permits needed to construct the home;
• the taxpayer serviced and deducted the interest on loans necessary to finance the
acquisition of the property;
• the taxpayer reflected in its financial statements the advance of funds by the shareholder to the taxpayer in order to acquire the building site;
• the taxpayer recorded on its books the lands and improvements related to the
property as inventory and reflected the sale accordingly; and
• the taxpayer paid HST on the supplies, materials, appliances, and third-party services and claimed related input tax credits.
The foregoing factors were consistent with the taxpayer having the beneficial ownership interest in the land and improvements. This decision confirms that the absence of a written Trust Declaration (or a Trust Declaration of questionable validity) is not fatal to proving the existence of a bare trust or nominee arrangement. In short, the Court established the legal and cash trail to determine who was the real (i.e. beneficial) owner of the property.
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