Bare Trusts are an important tax and estate planning tool that can be used in many contexts. A common example where bare trusts would be useful is in real estate transactions where a parent is on title with the child for mortgage reasons but the intention is for the child to have full ownership of the property.
In law, there are two types of ownership of property. There is the “legal ownership” or “legal title” of the property which is generally held by the person whose name is registered with that property. The second type of ownership is “beneficial ownership”. The beneficial owner is the person who is entitled to the benefits (ie. capital, income, use) of the property.
In most cases, the legal and beneficial owner is the same person (ie. I own a bank account or house for my own uses). But there can be situations where legal and beneficial ownership are split whether intentionally or unintentionally (ie. my name is on the title of a house with my child but my child pays the mortgage and uses it exclusively).
To summarize, a bare trust involves three parties:
- The settlor(s) in a bare trust is the beneficiary(s). In other trusts, these parties are often separate.
- The trustee(s) who hold legal ownership. In a bare trust (unlike other trusts), the trustee has no independent power, or responsibility for dealing with the trust property. Their only role is to hold legal title.
- The beneficiary(s) who hold beneficial ownership. In a bare trust, the beneficiary has the right to the capital, assets, and income of the trust property. The beneficiary is also the person who will be the decision maker for dealing with the trust property.
A bare trust agreement drafted by a lawyer is important because it establishes a legitimate bare trust relationship between the parties. If there is a future dispute as to whether a bare trust exists between the parties, the trust agreement would be the primary proof that such a relationship exists. A properly executed trust document is the best defense to the CRA or other parties alleging an alternative arrangement.
Some potential issues to think about:
- A trustee in a bare trust has very limited responsibilities with respect to the trust property, but this is not necessarily true in other trust relationships. A bare trust agreement will establish the responsibilities of all parties and limit the liability of the trustee while also protecting the beneficiaries rights.
- There are a variety of uses for bare trusts in real estate transactions: minimizing land transfer taxes, joint ventures and partnerships, estate planning, etc.
- On February 4th 2022, there is draft legislation that proposes new tax reporting requirements for bare trusts. The legislation is not finalized so exact reporting requirements are not known at the moment (written April 27th 2022). If there are reporting requirements, bare trusts could result in some additional tax filing obligations and expenses.
If you think a bare trust might be a suitable tool for your real estate or estate planning needs, please reach out for a consultation.