Bare Trusts: Advantages and Disadvantages

Bare Trusts 

What is a Bare Trust?

A bare trust is a legal structure that facilitates the separation of legal and beneficial ownership over a property.

Generally, it's used in a real estate context. A bare trustee company is created, which is a BC corporation that holds the legally registered title to the property.

In a bare trust agreement, the beneficial ownership remains with the person who originally purchased the property. The beneficial owner is the person or persons who continue to make all arrangements; they're responsible for leasing the property, receiving rent, and reporting income.

The beneficial owner is the real owner of the property.

The bare trustee company is the one that is actually on the title, the company name is registered in the land title office (the “LTO”).

From a tax perspective, the trustee company isn't going to be reporting any taxes at all because they don't actually have beneficial ownership of the property. When it comes time to report annual income from rents or anything else associated with the trust property, the trustee company will have nothing to report, and similarly, when it comes time to sell the property, they don't have any gain to report; it's the person with beneficial ownership who's going to be reporting income tax and is going to be responsible for reporting any kind of other income and capital gains from the sale of the property.

What Are The Benefits?

Tax Purposes

The primary benefit of a bare trustee company is that you can avoid paying the property transfer tax (PTT) when it comes time to sell the property. At the time of sale, the property as well as the bare trustee company will be sold to the new owner. The shares in the bare trustee company will be sold for a dollar to the purchaser.

At that point in time, because there's no change of ownership in the land title office, there's no requirement to pay the property transfer tax, so this can be of great benefit to both the vendor and the purchaser. It can result in a higher sale price for the vendor, and it's something that's more attractive to purchasers.

Flexibility

Another benefit of using a bare trust is that it also allows for greater flexibility in who can be an owner of the property. Instead of having to register a new person on title every time they are added as an owner of the trust property, you can simply change who is an owner of the shares in the bare trustee company, so such a change becomes easier.

What Are The Disadvantages?

Cost

The disadvantages of setting up a bare trustee company are the costs. The costs of establishing a bare trust are that you need to establish a BC Corporation, and you're also going to need to create a bare trust agreement.

Costs are going to be around $1250 to $1500 dollars for that and then you will have the annual costs of maintaining the company of approximately $400.

Reporting Requirements

As of December 30, 2023, there are new reporting rules and obligations that need to be met for bare trusts in Canada.

These new trust reporting rules include filing an annual T3 Return with details like trust identification, creation date, and trust documents. Beneficial ownership information, including trustees, settlors, beneficiaries, and controlling persons within the bare trust, must be reported on Schedule 15. 

The filing deadline for the T3 Return and Schedule 15 is within 90 days after the trust's tax year-end. If you don’t file before this date, you will likely face penalties from the Canada Revenue Agency. 

Some exemptions apply for newly formed or low-value bare trusts. Before forming a bare trust, it is important to make sure that the person responsible for filing reports is aware of the new trust reporting rules and able to do so on time.

FAQ

How does a bare trust differ from other types of trusts?

Unlike discretionary trusts, in a bare trust, the trustee has no decision-making power over the assets. The beneficiary has direct control, and the trustee acts only on their instructions. This simplicity is the key difference from other trust structures.

How is a bare trust set up?

Setting up a bare trust involves drafting a trust agreement, appointing a trustee, and transferring the legal title of the asset to the trustee. It's advisable to consult with a legal professional to ensure compliance with Canadian laws.

Who can be a trustee in a Bare Trust?

Almost anyone can be a trustee in a Bare Trust, including individuals and corporations. However, it's important to choose someone trustworthy and capable of managing the trust's responsibilities.

How does a bare trust affect estate planning?

Bare trusts can be used in estate planning to manage and transfer assets efficiently. They can help in avoiding probate fees and simplifying the transfer process for beneficiaries.

Please don’t forget to subscribe to my YouTube Channel!