Recently, the government has implemented new reporting requirements for bare trusts that will likely have many more Canadians filing tax returns this year than in the past.
But what are bare trusts, and what are their tax filing requirements? In this blog, we will define a bare trust and help you determine if the new tax requirements apply to you.
What is a Bare Trust?
The term “Bare Trust” is not defined in the Income Tax Act. Put simply, a bare trust is a legal arrangement where assets are held by a trustee for the benefit of a beneficiary. In these arrangements, the trustee has no significant powers or responsibilities beyond holding the legal title to the asset. In other words, the beneficiary is the true owner of the assets held in trust, and the trustee has no power to decide how the assets are managed or distributed.
In many cases, these bare trusts will be deemed to exist: there does not need to be formal trust documentation in place. Whether a bare trust is deemed to exist would be determined on a case-by-case basis by the Canada Revenue Agency (CRA)
Common Bare Trust Situations
How do you know if you are part of a bare trust arrangement? Some common examples of bare trusts are:
- A parent co-signing a mortgage for their child
- A parent or grandparent who has a bank account for a minor child or grandchild
- An adult child with joint ownership of their parent’s bank account, investments, or real estate for estate planning purposes
Who Has to File a Trust Tax Return?
For the calendar year ending on December 31, 2023, and onward, the trustees of the trust are required to file an annual T3 return with the CRA. The trustees are the people who hold the title to the assets on behalf of others. While bare trusts may not have any tax owing to the government, a return must still be filed to avoid non-compliance penalties of up to $2,500.
Some common exceptions include registered education savings plans (RESP), registered retirement savings plans (RRSP), tax-free savings accounts (TFSA) as well as certain bank accounts holding less than $50,000.
There is good news. CRA is aware that many Canadians with bare trusts that may have had no accounting or legal requirements in the past will suddenly have to submit one or more annual tax filings. Because of this, CRA is taking an educational approach for the 2023 tax year and waiving penalties for those who file late. Regardless, it is highly advisable to seek guidance from legal and financial professionals to make sure you are compliant going forward.
Bare trusts serve as valuable tools in estate planning, offering control, flexibility, and privacy in asset management and distribution. By understanding the fundamentals of bare trusts, individuals can make informed decisions to safeguard their wealth and provide for their loves ones effectively.
Are you ready to begin planning your wealth & asset management, and estate planning? Look no further than the experts at Scrivens here.
Bare Trust FAQ
What is a Bare Trust?
In Canada, a Bare Trust is a type of trust where the beneficiary has absolute ownership and control over the trust assets, including both capital and income.
The trustee holds legal title to the assets but has limited involvement and discretion since the beneficiary has the right to the assets and income generated by them.
What is a Will Trust VS a Bare Trust?
Will Trust: A Will Trust is established through a person's will and comes into effect upon their death. The assets of the trust are typically distributed according to the terms outlined in the will. Will Trusts can be discretionary or fixed, and they offer various levels of control over the assets by the trustee.
Bare Trust: A Bare Trust, as mentioned earlier, allows the beneficiary to have direct and immediate ownership of the trust assets once certain conditions are met, such as reaching a specified age. Unlike a Will Trust, a Bare Trust can be established during the lifetime of the settlor and does not necessarily involve a will.
What is the purpose of a Bare Trust?
The purpose of a Bare Trust in Canada is to provide a simple and efficient means of holding assets for the benefit of a beneficiary, particularly minors or individuals who may lack the legal capacity to manage assets on their own. Bare trusts offer straightforward asset-holding arrangements where the beneficiary ultimately gains full control over the assets.
Are Bare Trusts taxable?
In Canada, the taxation of Bare Trusts depends on various factors, including the type of assets held within the trust, the income generated by those assets, and the residency status of the trust and its beneficiaries. Bare Trusts may be subject to taxation on income earned within the trust, and specific tax rules and rates apply to different types of income and assets.
Why use a Bare Trust in Canada?
Some reasons to use a Bare Trust in Canada include:
- Providing for the financial needs of minors or beneficiaries who lack the legal capacity to manage assets.
- Facilitating straightforward asset management and eventual transfer of ownership to the beneficiary.
- Potentially minimizing probate fees and estate taxes.
- Offering flexibility and control over the distribution of assets according to the settlor's wishes.
- Protecting assets for the benefit of beneficiaries while maintaining transparency and simplicity in the trust structure.