The new trust reporting rules take effect for the taxation year ending after December 30, 2023. The Canada Revenue Agency (“CRA”) now requires trusts to be declared through annual filings if certain criteria are met. Many trusts (including bare trusts) that did not previously have to file tax returns are now required to do so.
What is a trust? A trust is a legal arrangement where one party, known as the “trustee,” holds assets on behalf of another party, known as the “beneficiary.” A bare trust, also known as a simple trust, is a basic type of trust arrangement where the trustee is the legal owner and the beneficiary has beneficial ownership, meaning the beneficiary has absolute entitlement to the trust assets. The trustee holds legal title to the assets on behalf of the beneficiary, but the beneficiary has the beneficial title and the right to direct the trustee in how to manage and distribute those assets. This article focuses on explaining what bare trusts are, since these used to be ignored by the CRA for tax purposes, but are now caught by the new reporting rules.
Here are some examples of bare trusts:
Real Estate Ownership: A common example is when one person holds legal title to a property, but the beneficial interest belongs to another individual. This often occurs in family arrangements, where parents hold property in trust for their children or spouses hold property for each other’s benefit. Often times, an adult child cannot qualify for a mortgage, so he or she adds the parents to the mortgage, the bank then asks the parent to be added to title as well. The parent and the child have a verbal agreement whereby the parents will get removed from title once the child can qualify for the mortgage on their own.
Bank Accounts: Individuals may set up bare trusts for ease of administration purposes, where one person is added as “joint” to an account for the purpose of helping another person administer it. A common example is where an adult child gets added as joint to an parent’s account to help the aging parents with the administration of their finances. The child hold 50% of the funds in the account in trust for the parent. No formal trust document has been signed, but if the parent were to pass away, the bank account would revert to the estate and not be inherited by the adult child through right of survivorship.
Inheritance Planning: Bare trusts are frequently used in estate planning to pass assets to beneficiaries. For instance, a grandparent may hold funds in trust for a grandchild until they reach a certain age or milestone.
Business Interests: In business partnerships or joint ventures, one partner may hold shares or assets in trust for the benefit of the other partners, or the shareholders hold the corporate bank account for the benefit of the corporation.
Personal Property: Assets such as vehicles, valuable collectibles, or valuable personal belongings may be held in trust for another person.
Debt Arrangements: In some cases, individuals may hold assets in trust to secure a debt obligation or to manage repayment terms. Creditors are vicious, so a person may transfer assets out of their name to someone else (like a family member) under their own financial crisis has resolved. The family member only holds that asset in trust until the creditor problems get resolved, and there is likely a verbal agreement between the two to this effect.
Charitable Trusts: Individuals may establish bare trusts for charitable purposes, where the trustee manages assets for the benefit of a specific charity or charitable cause.
Sometimes, though, it’s better to look at the situation from the perspective of what is NOT a trust.
Tenants: A lives in B’s house (whether they pay rent or not) without any intention that B holds any part of that property in trust for A; even though A benefits from living in B’s home, A doesn’t become beneficial owner of the title to the home, since there is no intention or understanding that B wants to give title to A during their lifetime and no verbal agreement to such effect.
Gifts or Loans: If a person transfers property to another individual as a gift or loan, without any intention to create a trust relationship, it would not be considered a bare trust. The recipient would simply hold legal title to the property, with no obligation to manage or distribute it on behalf of the giver. Any arrangement regarding the use or repayment of the property would be governed by the terms of the gift or loan agreement.
Safekeeping of Valuables: A person may temporarily hold valuables, such as jewelry or collectibles, for safekeeping on behalf of another individual. If there is no intention to create a trust relationship, and if the person holding the valuables does not have the authority to manage or dispose of them on behalf of the owner, it would not be considered a bare trust. The person holding the valuables would simply be acting as a custodian or bailee.
If you think you may gave a bare trust scenario, our office is prepared to provide support by drafting the necessary legal documentation, such as the Declaration of Trust. Each person’s situation is different and the unique facts need to be reviewed with a legal professional to obtain a conclusive answer of whether a particular arrangement gives rise to a trust.
PLEASE NOTE THAT THE CONTENT OF THIS BLOG IS MERELY FOR INFORMATION PURPOSES AND DOES NOT CONSTITUTE LEGAL ADVICE.
