Her Majesty the Queen v. Cheema, 2018 FCA 45 (CanLII)

Often home buyers need to rely on a guarantor in order to allow them to qualify for the mortgage. In such cases, a lender often requires the guarantor to be registered as an owner of the property; even if the parties agree that the purchasers are the sole beneficial owners of the property. In this context, the guarantor, or bare trustee, holds no beneficial interest in the property although they are a registered owner of the property.

To assist home buyers’ in purchasing new homes, the Excise Tax Act (the “ETA”) contains a provision, which provides GST/ HST rebates, known as the New Housing Rebate (“NHR”), to certain qualified home buyers purchasing new homes.  Specifically s. 254 (2)(b) of the ETA provides that in order to qualify for the NHR:

 (b) at the time the particular individual becomes liable or assumes liability under the agreement, the particular individual is acquiring the complex for use as the primary place of residence of the particular individual or of a relation of the particular individual, [Emphasis Added].

Typically a bare trustee is considered a non-entity for tax purposes. However in the recent case of Her Majesty the Queen v. Cheema, 2018 FCA 45 (CanLII), a majority (2-1) of the Federal Court of Appeal (the “FCA”), held that a bare trustee was a “particular individual” for the purposes of NHR. The result was that the owners did not qualify for the NHR because the bare trustee did not meet the above residency requirements set out under s. 254(2) (b) of the ETA.

In Cheema a husband and wife purchased a new home with the assistance of a friend who agreed to act as guarantor in the transaction. The guarantor also executed the Contract of Purchase and Sale. The intention of all of the parties was that only the husband and wife would hold a beneficial interest in the property. The bare trustee of course never had any intention of moving in with the husband and wife and occupying the new home as his principal residence. A written agreement was executed at the time of closing (after the contract of purchase and sale was executed) to document the parties’ intentions that the guarantor would be a registered owner but only as a bare trustee.

The FCA adopted a strict reading of the ETA in overturning the lower court’s decision. The FCA held at para 94:

“The prerequisite in para. 254 (2) (b) is drawn up in a way that makes those facts [the bare trust agreement] irrelevant. It 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.”

In interpreting the definition of a “particular individual” the FCA noted:

[91]           Section 40 of New Harmonized Value-added Tax System Regulations, No. 2, SOR/2010-151, which applies in this case (see section 256.21 of the Excise Tax Act), provides that if supply of the complex 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. Under the agreement of purchase and sale, the supply of the complex was made to both Dr. Akbari and Mr. Cheema. Thus, the second prerequisite—use of the complex as the primary place of residence—must be satisfied by both Dr. Akbari and Mr. Cheema.

[92]        Mr. Cheema acquired the complex as his primary place of residence. Dr. Akbari did not. He never intended to occupy the property as his primary residence. Thus, the second requirement was not met.

The FCA went on to explain at paras 95-97 that:

“[95]           The fact that Dr. Akbari was acquiring the complex only as a trustee is of no consequence. The agreement of purchase and sale does not distinguish between Dr. Akbari and Mr. Cheema as purchasers. Nor does SECTION 254 provide any exception for trustees.

[96]           In any event, PARA. 254(2)(b) requires us to examine the purchaser’s intended use of the complex at the time the purchaser “becomes liable or assumes liability under an agreement of purchase and sale of the complex.” Even if we are to give effect to the trust agreement, it did not exist at that point in time.

[97]           Parliament was detailed and precise in the wording of the prerequisites for the rebate set out in SECTION 254 and it is not for this Court, in the words of Placer Dome (at para. 23), “to create an unexpressed exception” or “supplant” the clear language in SECTION 254.”

The decision is somewhat surprising and appears to be a departure from how bare trustees are normally treated for tax purposes. In cases where the bare trustee cannot meet the requirements of s. 254(2) (b), the decision also defeats the purpose of the NHR, which is to mitigate some of the costs of purchasing new residential property. It is unclear how broadly the decision will be applied.