In case you missed it, the Canadian federal government recently proposed changes to the reporting requirements for bare trusts. If this new legislation is passed, bare trusts will be required to file a T3, Trust Income Tax and Information Return, beginning with their first taxation after December 30, 2022. But before going over what that proposed requirement means, let’s review what is a bare trust and what are its advantages.
What is a bare trust?
In real estate and property management, a bare trust is a binding obligation given to a trustee to hold legal title of a property, as appointed by a settlor or beneficiary. The trustee’s only responsibility is to give the title of the property over to a third party or beneficiary at the direction of the property’s beneficiary.
In other words, a trustee of a bare trust can only transfer the property title. They cannot use the property or manage it in any way. Ultimately, in a bare trust arrangement, the owner of the property keeps full control and ownership of the property while appointing someone else to have legal title of the property.
What are the advantages of a bare trust?
A bare trust has a variety of benefits depending on how it’s used. For example, it can be used to make property transfers much faster and easier, or as a means to avoid Ontario’s high probate fees.
Here’s how: in the case of avoiding expensive Ontario probate fees, one situation could be a person having a property that goes through a secondary will that controls any assets that are not subject to probate along with a concurrently signed Bare Trust Agreement. The result is having an appointed bare trust trustee who possesses legal title of the property and can then ensure that the property could be transferred to the named beneficiary (if applicable) through the second will upon the death of the initial property owner. Because the bare trustee would already have legal title over the property through this process, the legal title will not have to be re-registered, which avoids paying expensive probate fees.
But it is worth noting that estate planning and probate can be a complex process! It is recommended you speak with experienced professionals who handle and understand probate, such as the licensed team at AvoidProbate.ca. Our certified team of advisors are here to help with your estate planning and probate every step of the way. Contact us today to learn how!
So, how does the proposed legislation affect bare trusts?
The new proposed legislation from the federal government requiring bare trust trustees to annually file a T3, Trust Income Tax and Information Return, forces bare trusts to disclose the names, dates of birth, addresses, tax residences, and taxpayer identification numbers for the settlor, the beneficiaries, the trustees, and anyone with direct influence over the trustees.
Previously, bare trusts were ignored by the Canada Revenue Agency (CRA) since the settlor or beneficial owner was responsible for reporting any income, losses, gains, etc. regarding the property. But if the T3 is not filed under these proposed changes, the bare trust trustee could be liable and face harsh penalties, such as a sum equal or greater to the amount of (1) $2,500; or (2) 5% of the highest fair market value of the trust property, whichever is higher.
This now forces residents to rethink whether a bare trust structure is beneficial given the new reporting requirements, should these changes move from proposed legislation to law.
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