Bare Trusts in Canada: Benefits & 2024 Tax Changes

A bare trust, also known as a simple trust or naked trust, is a legal arrangement in Canada where a trustee holds legal title to assets for the benefit of another person, known as the beneficiary. The key feature of a bare trust is that the beneficiary has absolute entitlement to the assets and any income they generate.

In a bare trust, the trustee's role is limited to holding the legal title and following the beneficiary's instructions regarding the trust assets. The beneficiary has full control over the assets and can demand their transfer at any time.

This simple structure makes bare trusts distinct from other types of trusts in Canadian estate planning. The beneficiary effectively owns and controls the assets, while the trustee acts as a mere nominee or agent.

Bare trusts stand apart from other trust types due to their simplicity and the level of control given to the beneficiary. Unlike discretionary trusts or family trusts, where trustees have decision-making power, trustees of a bare trust have no active duties or discretion in managing the trust assets.

In contrast to living trusts, which often involve ongoing management and distribution decisions by trustees, bare trusts provide immediate and absolute entitlement to the beneficiary. This means the beneficiary can access and use the trust assets as they see fit, without needing approval from the trustee.

Living trusts in Canada offer different advantages, such as potential probate avoidance and ongoing asset management. However, they typically involve more complex structures and ongoing administration compared to bare trusts.

Bare trusts offer several advantages, making them a strategic choice:

• Simplicity and Transparency: Not only do the beneficiaries hold all rights to a bare trust, but their rights regarding that trust are straightforward, and lack the layers of complexity found in several other trust types. A bare trust’s structure is simple and clear, with fewer administrative complexities when compared to other financial arrangements.
• Streamlined Asset Transfer: Making transfers with a bare trust is typically simpler than with other trust arrangements. A more streamlined process also means that the complexities and delays of probate are more likely to be avoided. This makes it an attractive option for certain transactions, like property transfers.
• Estate Planning and Asset Protection: Bare trusts provide a simple means of accomplishing estate plans and asset transfers, and offer a layer of protection for these assets. They allow the beneficiary full control of asset management without the additional steps and details of more discretionary trusts. Since the legal title is held by the trustee and thus separated from the beneficiary’s ownership, this safeguards assets from potential claims against them.
• Tax and Legal Considerations: The clear division in roles and responsibilities between trustee and beneficiary can simplify the tax and estate planning processes. While bare trusts themselves don't provide direct tax advantages, they can be structured as part of broader tax planning strategies to manage tax liabilities effectively.
• Privacy and Confidentiality: Bare trusts are also particularly useful for maintaining privacy. The identity of the owners can be kept confidential, as the legal title of the assets is held in the trustee’s name. This can be particularly beneficial in sensitive business transactions or investments, where disclosing the identity of the real owners may be undesirable or negatively impact the transaction.
• Versatility in Use: Because they can be used in such a wide variety of contexts, including real estate transactions, business arrangements, and asset protection strategies, bare trusts easily showcase their broad applicability.

Bare trusts provide Canadians with an incredibly versatile tool. They can be incorporated into countless personalized estate or asset management plans, but here are some of the more common situations where the benefits can be particularly advantageous:

1. Maintaining Privacy of Asset Ownership: Bare trusts offer a layer of privacy regarding asset ownership. For example, real estate property can be held in a bare trust while keeping the owner’s identity confidential. This can be suitable for high-profile individuals who wish to avoid attention or public scrutiny, or families with complex or challenging relationships.
2. Maximizing Tax Efficiency: While bare trusts don’t directly provide any tax benefits, they can be used to create a more tax-efficient estate plan. Since the beneficiary retains control over the trust’s assets, a plan can be structured to minimize tax liabilities while still maintaining compliance with Canadian tax laws.
3. Ease in Property Transfer: Bare trusts simplify the process of transferring property. Although the legal title is held by the trustee, the beneficiary can still direct the sale or transfer of the property without the need to change the legal title before the transaction is completed. This speeds up the transfer process and reduces administrative burdens.
4. Joint Ventures and Partnerships: Bare trusts can also be useful in a business context. With joint ventures or partnerships, bare trusts allow multiple parties to hold an interest in an asset without requiring the name of each party to be listed on the title. The trustee still holds the title on behalf of the joint venture or partnership, but this setup can allow for a more streamlined process.

Key Features of Bare Trusts

There are several distinctive features which differentiate bare trusts from other types of trusts. Most of these center around the aspect of ownership and the roles of the trustee and beneficiary. Taking the time to understand these key traits is an important step for anyone considering a bare trust for their financial or estate planning needs.

• Beneficiary Ownership: Beneficiaries of a bare trust have total ownership over the assets. They are entitled to all the benefits that come from these assets, such as any income or capital gains.
• Passive Trustee Role: Trustees are bound to act only on behalf of the beneficiary. They have no say in how the trust’s assets are managed, and cannot make any independent decisions about the trust. Their role is simply to hold and transfer any requested assets.

In a bare trust, all income – such as interest, dividends, and all capital gains generated by the trust's assets – are attributed directly to the beneficiary. The trust itself does not pay taxes on these earnings, but they are still attributed to the beneficiary for tax purposes.

Tax Responsibilities

Beneficiaries must report the income and capital gains from the trust’s assets on their personal tax returns. They are taxed on this income at their individual tax rates. Since the income and gains are taxed at the beneficiary’s level, there is no risk of double taxation at the trust level. This is not the case for every kind of trust, where different tax rates may apply, which is another benefit to these trusts.

It is important to note that because all interest is attributed to the beneficiary, this also means that the beneficiary is equally responsible for correctly reporting the income, and any tax liability falls on them rather than the trust.

Recent tax law amendments in Canada also impact reporting obligations, so be sure to seek the help of a financial professional for complete certainty as to which forms are required. Both trustees and beneficiaries must adhere to tax laws regarding bare trusts. This includes accurate reporting of income and capital gains, and adherence to current tax laws and trust reporting requirements.

Changes in Compliance

The Canada Revenue Agency (CRA) has announced that bare trusts will not be required to file a T3 Income Tax and Information Return (T3 return) or Schedule 15 for the 2024 tax year, unless specifically requested by the CRA. This continues the exemption previously granted for the 2023 tax year.

Proposed Changes for 2025 and Beyond Under proposed legislation, significant changes to bare trust reporting requirements would take effect starting with the 2025 tax year:

Exemptions from Filing T3 Returns Starting in 2025, bare trusts would be exempt from filing T3 returns if they meet any of these criteria throughout the year:

• All beneficiaries are legal owners of the trust property, and all legal owners are beneficiaries
• Legal owners are all related individuals, and the property could be designated as a principal residence for at least one owner
• The legal owner is an individual holding property for their spouse/common-law partner's use or benefit as a potential principal residence
• Legal owners are partners (excluding limited partners) holding property solely for partnership use
• Property is held pursuant to a court order
• Canadian resource property is held solely for publicly listed companies
• Non-profit organizations holding government funds for other non-profit organizations

Common Exempt Scenarios Include:

• Joint bank accounts between spouses
• Parents on legal title of a child's principal residence for mortgage purposes
• Family homes with single-spouse legal title but joint occupancy

Notable Non-Exempt Scenarios:

• In-trust accounts for minor children
• Adult children added to parents' accounts for administration purposes

T3 Schedule 15 Requirements and Exemptions Starting with December 31, 2024 tax years, expanded exemptions from Schedule 15 filing include:

1. Trusts with total assets valued at $50,000 or less throughout the tax year (no asset type restrictions)
2. Trusts meeting all these conditions:
3. • All trustees and beneficiaries are individuals
   • Each beneficiary is related to each trustee
   • Trust property value is $250,000 or less throughout the year
   • Holdings limited to specific assets (deposits, GICs from Canadian banks, government debt obligations, personal-use property, listed securities)

Non-Compliance Penalties Failure to meet filing requirements can result in significant penalties:

• Late filing: $25 per day (minimum $100, maximum $2,500)
• Knowing or grossly negligent failure: Greater of $2,500 or 5% of the maximum property value held during the taxation year

Filing Deadlines

• T3 returns must be filed within 90 days after the trust's tax year-end
• For trusts with December 31, 2024 year-end, the filing deadline is March 31, 2025
• First-time filers need to obtain a trust account number before electronic filing

Is a Bare Trust Right for Your Situation?

While bare trusts offer a simpler solution for asset management and estate planning in Canada, understanding the new reporting requirements is crucial for your financial success. Whether you're considering privacy protection, tax efficiency, or streamlined asset transfers, a bare trust might be the right solution for your estate plan.

Ready to explore if a bare trust aligns with your estate planning goals? Our estate planning specialists will help you:

• Evaluate if a bare trust suits your specific situation
• Understand the 2024-2025 reporting requirements
• Create a compliant trust structure
• Develop a comprehensive estate plan

Book your free consultation today with our estate planning experts to create a strategy that protects your assets and secures your legacy.