Bare Trusts: The Basic Terms Every Canadian Business Owner Should Know
Bare Trusts: The Basic Terms Every Canadian Business Owner Should Know
DISCLAIMER
This information is intended for business owners in Canada and serves as general guidance only. Always consult with a qualified advisor before making any legal decision.
In this article, we’ll cover the following topics:
What is a bare trust?
What are the benefits of bare trusts?
Avoiding property transfer taxes
Easier change of property ownership
What is a bare trust?
Often used in real estate, bare trusts are legal structures that facilitate the separation of legal and beneficial ownership of a property. The process of creating a bare trust involves appointing a trustee (or ‘nominee’) to be legal owner of the property and hold the legal title on behalf of the beneficial owner. The name “bare trust” is derived from the fact that, unlike in other forms of trusts, the trustee/nominee of the bare trust has no other responsibilities or obligations with respect to the property other than to hold legal title.
In a bare trust, the beneficial owner is the one responsible for leasing the property, collecting rent, reporting income and paying taxes, and other day-to-day operational tasks.
However, the bare trustee company – the legally registered owner of the property – is the one listed on the property title.
In this structure, the bare trustee company does not report property taxes because, technically speaking, they do not have beneficial ownership of the property – i.e. they are not the real owners. Accordingly, it’s the beneficial owner who handles all financial reporting.
What are the benefits of bare trusts?
Generally speaking, there are two benefits to bare trusts.
Avoiding property transfer taxes
If you’re looking to sell a property, establishing a bare trust will, to some extent, allow you to sidestep painful property transfer taxes.
Let’s say you have a property that you are interested in selling. If you hold the property in a bare trust company, you can transfer the shares in the bare trust company, together with the beneficial ownership, to the buyer. For all practical purposes, the ownership of the property moves to the purchaser; however, from the perspective of the land title office, there has been no change in ownership (i.e. the legal title remains with the company). Accordingly, there is no trigger for property transfer tax – a win-win for you and the purchaser, which may permit you to sell the property for a higher amount.
Ease of structuring complex property ownership models
Another benefit of using a bare trust is the flexibility that bare trusts provide when it comes to co-ownership. Through a bare trust, multiple co-owners can share beneficial ownership, and transfer their portion of the beneficial ownership, without having to effect these changes in the land title office. Rather than having to navigate through the processes of registering a new person on title, you can simply exchange or issue new shares of the trustee company.
Want to learn more about bare trusts? We’re here to guide you. Click here for an overview of our bare trust services, or get in touch using the form below.
