Bare Trusts and New Reporting Rules

With limited exceptions, starting with the 2023 tax year, the trust reporting rules in Canada have expanded to capture bare trust arrangements.

A bare trust is an arrangement whereby a person(s) or corporation (the “bare trustee”) holds legal title to real property or other assets, but the beneficial interest – the true ownership – belongs to another person(s) or entity (the “beneficial owner”). Unlike a true trust, in a bare trust arrangement, the bare trustee has no actual powers or discretion.

The sole role of a bare trustee is to hold legal title to the bare trust assets for the sole and exclusive benefit of the beneficial owner. The bare trustee has no independent right or authority to deal with the asset. Since true ownership remains with the beneficial owner, the beneficial owner can compel the bare trustee to transfer legal title back to the beneficiary at any time.

The beneficial owner pays all costs and expenses associated with the trust assets and receives all income, profits and gains derived therefrom. A bare trust arrangement is usually documented by way of a bare trust agreement between the parties or a trust declaration signed by the bare trustee. However, I routinely come across bare trust arrangements which have not been documented.

Bare trusts are commonly used to:

1. Avoid probate or reduce probate fees – Example: A parent adds their adult child to title to their condominium with the expectation that title will pass to their child on the death of the parent by right of survivorship, thereby avoiding probate in respect of that asset.

2. Ensure privacy/maintain the anonymity of the true owner – this can be done for “creditor-proofing

3. Obtain financing – Example: An adult child adds a parent to title to their new home in order to obtain bank financing

4. Administer joint ventures and partnerships - Example: A nominee corporation holds legal title to property on behalf of a group of owners. The beneficial owners can change without the necessity of changing legal title/land records.

Until recently, this arrangement required little or no tax reporting as the beneficial owner reported all income and gains on their personal (or corporate) tax return. Where title is held by a nominee corporation as bare trustee rather than an individual, the corporation must file a corporate return each year, but, in most cases, it would be a straightforward “NIL return” as the nominee corporation earns no income from the bare trust assets.

Under the new trust reporting rules, bare trustees are now required to file a T3 return annually, even if there is no income to report. The expanded trust return identifies all trustees, the settlor, beneficiaries and controlling persons, including SINs for individuals.

While still an effective tool, this once simple arrangement now promises to be an administrative burden, especially if the bare trust holds title to real property in Canada, as the bare trustee must now file an Underused Housing Tax return as well on an annual basis.

If you have a bare trust arrangement, or think you may have one, you should reach out to your tax advisor immediately to ensure all required filings are completed in time. There are significant late filing penalties. You should also consider whether the administrative costs associated with the ongoing compliance outweigh the expected benefits and tax savings. If not, consideration should be given to unwinding the bare trust arrangement.