Canada: Supreme Court Of Canada Endorses The Federal Court Of Appeal's Denial Of GST/HST New Housing Rebate Where A Bare Trustee Takes Title – Application For Leave To Appeal Denied: Cheema v The Queen, 2019 Canlii 10518

Last Updated: March 14 2019
Article by David Rotfleisch

Introduction - The Queen v Cheema

On February 14, 2019, the Supreme Court of Canada dismissed the taxpayer's application for leave (permission) to appeal the Federal Court of Appeal's split decision in The Queen v Cheema (2018 FCA 45). In that case, a majority of the Federal Court of Appeal held that a new-home purchaser cannot claim the GST/HST New Housing Rebate if a co-signer of the purchase agreement doesn't also occupy the home—even if the co-signer acted as a bare trustee for the purchaser's benefit. The majority Federal Court of Appeal's decision stood in sharp contrast to the treatment of bare trusts in Canadian tax law, which generally ignores such a trust for tax purposes. By refusing to hear the taxpayer's appeal, the Supreme Court of Canada has thereby entrenched a move away from general tax principles and bare trusts.

After articulating both the requirements of the GST/HST New Housing Rebate and the nature of a bare trust, this article explores the development of the Cheema case from its start in the Tax Court of Canada to its end at the doorstep of the Supreme Court of Canada.

Sections 256.1 & 254(2) of the Excise Tax Act: The GST/HST New Housing Rebate

Section 256.1 of Canada's Excise Tax Act (along with the relevant provincial regulation) permits a new housing rebate. In Ontario, the rebate is an amount of up to $24,000 for a residential complex, and the availability of the Ontario rebate doesn't 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 conditions for receiving the GST/HST New Housing Rebate. All of these conditions must be satisfied to receive the new housing rebate:

  • The home or condo builder sells the property to an individual purchaser (i.e., the purchaser can't be a corporation or trust).
  • The purchaser buys the home or condo for use as his or her "primary place of residence" (or the primary place of residence of his or her relative or spouse). The timing of the intention is also relevant—in particular, the purchaser's intention to use the home or condo as a primary place of residence must exist "at the time the [purchaser] becomes liable or assumes liability under an agreement of purchase and sale."
  • The purchaser "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 purchaser after the home or condo's construction or substantial renovation.
  • The purchaser (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 purchaser, all of them as a group must satisfy the occupancy requirement (subsection 262(3) of the Excise Tax Act).

The Bare Trust & Its Canadian Tax Treatment

The trust concept finds its roots in equity, a body of law developed in the English Court of Chancery and adopted by Canadian courts. Equity distinguishes legal ownership from beneficial ownership. A person legally owns a property if his or her name is on title, yet the beneficial owner 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 is a relationship between a trustee, a beneficiary, and a property. And it depends on the distinction between beneficial and legal ownership: the trustee legally owns the property; the beneficiary (unsurprisingly) beneficially owns the property.

Typically, the trust's creator (a.k.a. the settlor) will burden the trustee with duties to maintain or manage the trust property in the beneficiary's favour. For instance, the settlor might require that the trustee manage a large sum of money for a child or disabled beneficiary.

A bare trust, however, is a trust where the trustee legally owns a property with the sole duty of conveying title 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)).

Canada's tax laws generally look through a bare trust. Canadian tax courts treat a bare trust as akin to an agency relationship. In an agency relationship, the agent deals with property on its principal's behalf. Canada's tax laws ignore the agent and treat the principal as having dealt directly with the property. In the same way, Canada's tax laws ignore the bare trustee and treat the beneficiary as having dealt directly with the trust property.

And, until the Federal Court of Appeal's decision in Cheema, courts had 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, [1999] 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."

Moreover, this treatment wasn't specific to Canadian income tax. It also applied in cases involving GST/HST (Harmonized Sales Tax and Goods and Services Tax). That is, courts had also ignored bare trusts when applying the provisions of the Excise Tax Act: (see, e.g.: 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 have interpreted this clause as Parliament's way of confirming that the Income Tax Act's trust provisions don't apply to a bare trust.

The Dilemma of Mohammad N. Cheema

Mr. Mohammad N. Cheema wished to purchase a newly built residential property. He couldn't, however, secure a mortgage by himself. So, Mr. Cheema asked his buddy, Dr. Akbari, for help.

So, to assist Cheema get a mortgage, Dr. Akbari signed the agreement of purchase and sale as a purchaser—along with Cheema and his spouse. The Cheema and Akbari also agreed that Akbari wouldn't have any substantive interest in the property, wouldn't pay any of the purchase price or expenses, and wouldn't live in the house.

On closing, Cheema and his spouse acquired an undivided 99% interest in the property; 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 Cheema's GST/HST New Housing Rebate on the basis that Akbari neither acquired the property as his primary residence nor occupied the residence.

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:

  • Does an individual who acquires title as bare trustee also need to satisfy the Excise Tax Act's conditions to receive the GST/HST New Housing Rebate?

In other words, does a person who signs the agreement of purchase and sale in the capacity of a bare trustee also need to live in the property?

The Tax Court's Decision: Cheema v Her Majesty the Queen, 2016 TCC 251

Appearing before the Tax Court of Canada, Cheema argued that Akbari wasn't subject to the conditions set out in subsection 254(2) of the Excise Tax Act because Akbari was a bare trustee. That is, to receive the GST/HST New Housing Rebate, Cheema and his spouse were the only ones required to live in the property and sign the purchase agreement with that intention.

The Crown didn't dispute the fact that Cheema and his spouse satisfied the rebate conditions. But the Crown contended that Akbari also needed to satisfy those conditions. The Crown alleged that, because he signed the agreement of purchase and sale, Akbari was required under the Excise Tax Act to occupy the property. Since Akbari didn't occupy the property, the rebate is unavailable.

The Tax Court of Canada allowed Cheema's appeal and permitted the GST/HST New Housing Rebate. Drawing from the traditional tax treatment of bare trusts, the court reasoned that a bare trustee 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 each of multiple purchasers to qualify for the rebate, does not bring a bare trustee into the scope of subsection 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 (ibid, at para 54). Sensing the problems that the Tax Court's decision may pose for the Canada Revenue Agency, 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

A split Federal Court of Appeal overturned the Tax Court of Canada's decision and decided that a taxpayer couldn't qualify for the GST/HST New Housing Rebate unless everyone who signed the purchase agreement occupied the home as a primary place of residence. Stratas J.A. delivered the majority opinion; Nadon J.A. concurred. Webb J.A., however, produced a forceful dissent.

The majority reasoned that the Tax Court erred by relying on the bare-trust agreement when rendering its decision. According to the majority Federal Court of Appeal, subsection 254(2) of the Excise Tax Act doesn't distinguish between beneficial and legal ownership; it requires that each individual who assumes legal liability to the builder under the purchase agreement to satisfy the rebate conditions.

In his robust dissent, however, Webb J.A. concluded that Akbari needn't satisfy the rebate conditions subsection 254(2) of the Excise Tax Act. Webb J.A. observed that the GST/HST New Housing Rebate was presumably meant to aid the beneficial owner's purchase of a newly built home. After all, the beneficial owner is generally the person who pays the GST/HST on the purchase. Also, the Excise Tax Act's rebate scheme notably doesn't contemplate the removal of a purchaser from the purchase agreement. This void, Webb J.A. suggested, indicates 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. predicted that the majority's judgement may lead to an unintended, perverse investment opportunity (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 decided against Cheema and held that a taxpayer couldn't 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.

The Failed Run for the Supreme Court of Canada

On April 4, 2018, Cheema applied to the Supreme Court of Canada for leave to appeal the decision of the Federal Court of Appeal. On February 14, 2019, the Supreme Court of Canada dismissed the taxpayer's application for leave to appeal Federal Court of Appeal's split decision (2019 CanLII 10518; Docket: 38090).

As a result, Canada's tax law is now set: you cannot qualify for the GST/HST New Housing Rebate unless everyone who signed the purchase agreement occupied the home as a primary place of residence—even if one of those individuals acquired title in the capacity as a bare trustee.

Commentary – Bare Trusts and the GST/HST New Housing Rebate

As Webb J.A.'s dissent hinted, the holding of the Federal Court of Appeal opens up an investment opportunity involving the GST/HST New Housing Rebate that Parliament presumably did not intend.

Moreover, the Federal Court of Appeal's decision opens additional issues. First, Cheema involved a relationship between the bare trustee, Akbari, and the beneficiary, Cheema, yet it's unclear whether 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 who needs to qualify 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.

Tax Tips: Qualifying for the GST/HST New Housing Rebate

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 shouldn't sign the agreement of purchase and sale unless he or she will also satisfy 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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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