Updated information on new Bare Trust reporting rules for 2023 can be found here. 

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When it comes to estate planning and asset management, Canada’s legal system offers various mechanisms to safeguard and manage property. One such instrument is the bare trust, which provides a flexible framework for holding assets on behalf of beneficiaries. For example, when a parent is listed on the title for a property where their child is the one living in and benefiting from the home. These types of arrangements are often not formally documented, but nonetheless exist in the eyes of the Canada Revenue Agency (CRA) as a trust or agent arrangement.

Understanding the rules surrounding bare trusts is essential for individuals seeking to protect and manage their assets effectively. Let’s delve into the concept of bare trusts in Canada, exploring their definition, key features, benefits, and important considerations including recently updated reporting rules.

What is a Bare Trust?

A bare trust, also known as a simple trust or nominee trust, is a legal arrangement or understanding where a trustee holds a legal title to assets for the benefit of a beneficiary. In a bare trust, the trustee’s role is limited to holding and transferring assets according to the beneficiary’s instructions, without having the authority to manage or make decisions about the assets independently. Essentially, the trustee has a “bare” or passive role and must act solely in the beneficiary’s best interests.

A bare trust is most commonly used in the following situations:

• Maintaining the privacy of the true owner
• Minimizing land transfer taxes or probate fees
• Gifting to a minor child
• Holding legal title on behalf of a joint venture or partnership
• Facilitating multiple transfers of title in a corporate reorganization

Key Features of Bare Trusts

Beneficial Ownership: Under a bare trust, the beneficiary maintains full beneficial ownership of the assets. Although the trustee holds legal title, or only part of the title, they are considered a mere nominee and have no rights or claims over the assets.

Passive Trustee: The trustee’s role is limited to following the beneficiary’s instructions regarding the assets held in the trust. They have no discretion to manage or distribute the assets unless specifically directed by the beneficiary.

No Duty of Care: Unlike other types of trusts, bare trustees are not required to exercise a duty of care in managing the assets. They are only responsible for carrying out the beneficiary’s instructions faithfully.

Benefits of Bare Trusts

Asset Protection: Bare trusts provide a secure means of holding assets, shielding them from potential creditors or legal claims. Since the beneficiary retains beneficial ownership, the assets are generally safe from personal liabilities.

Estate Planning: Bare trusts offer an efficient estate planning tool by allowing individuals to specify how their assets should be distributed among beneficiaries upon their death. This can help avoid complications and potential disputes that may arise in the absence of a clear estate plan.

Privacy and Confidentiality: Bare trusts can help maintain privacy and confidentiality, as the legal title is held by the trustee, keeping the beneficiary’s identity out of public records.

Important Considerations for Bare Trusts

Tax Implications: While bare trusts themselves do not have their own tax liability, any income or capital gains generated by the trust’s assets are attributed to the beneficiary for tax purposes. It is crucial to consult with a tax professional to understand the specific tax implications associated with bare trusts and your unique arrangement.

Legal Documentation: It is important to understand that a bare trust can exist without any legal agreement between the trustee or beneficiary.  However, it is always recommended that a formal legal agreement, such as a trust deed or declaration of trust, should be prepared. The document should clearly outline the roles and responsibilities of the trustee and the beneficiary, as well as any specific instructions regarding the assets.

Professional Advice: It is highly recommended to seek professional advice from an accountant and a lawyer or estate planner with expertise in trust law before setting up a bare trust. They can guide you through the financial considerations and legal requirements to ensure compliance with relevant regulations.

Changes to Bare Trust Reporting Rules

Previously, bare trustees were not required to file a trust return. All income and capital gains from the bare trust were reported by the beneficiary who was taxed accordingly.

However, as of December 2022, a trust return along with additional reportable information on ownership is required in the new form, Schedule 15. A Schedule 15 reports on information like name change, address, date of birth, tax number, and jurisdiction of residence, and may be required on an annual basis even if no activity has taken place.

This new rule is applicable for tax years ending after December 30, 2023 and the deadline for filing a trust is 90 days after a taxation year-end. Penalties for non-compliance are $25/day (minimum of $100) to a maximum of $2500 and a possible gross negligence penalty.

With the new rule, only reporting requirements change while the tax treatment remains the same.

Find more information on the bare trust rule change, including exemptions, click here.

Summary of Canada’s Bare Trust Rules

Canada’s bare trust rules provide individuals with a flexible and effective mechanism for managing and protecting assets. Understanding the key features, benefits, and considerations of bare trusts is crucial for anyone seeking to establish a trust arrangement. By working with legal and financial professionals, individuals can navigate the intricacies of bare trusts and make informed decisions to safeguard their assets and achieve their estate planning goals.

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Nothing in this article constitutes legal advice, and cannot be relied upon to determine the existence of a trust in your own personal situation. If you have any specific questions about trust law, please seek independent legal advice.