Here at Hull & Hull LLP, we are kicking off the month of April with this month’s blogging theme focusing on trusts. I thought there is no better time than to revisit what bare trusts are, their role in estate planning, and the new trust reporting requirements that will affect bare trusts.

First, let’s start with the basics. What is a bare trust? A bare trust (sometimes known as a ‘simple trust’ or ‘naked trust’) is a specific type of trust. It arises in circumstances where a trustee holds trust property without any obligations, duties or authority over the trust property. The one exception is that the bare trustee must convey the trust property to the beneficiary upon the beneficiary’s demand. At its most central, a bare trust separates the legal and beneficial ownership of property.

Bare trusts are often used by estate planners for probate planning purposes, so as to avoid paying estate administration tax on certain assets. As this informative article by Investment Executive explains, bare trusts are often used in scenarios where a testator has multiple wills. A secondary will exists to govern the assets that do not need to be probated, such as a home or cottage property. In this scenario, a corporation acts as the bare trustee to hold only legal title to the property, but the testator would remain the beneficial owner. On the testator’s death, the property would be transferred to the beneficiaries through the secondary will, and since the corporation would continue to hold legal title, title on the property would not need to be re-registered.

Moreover, bare trusts are often preferred by estate planners to provide privacy to clients regarding the ownership of certain property and to bypass land transfer tax in some instances.

As my colleague, Natalia Angelini, blogged about, changes are coming into effect with trust reporting requirements. The new trust reporting rules, set to come into effect for the trust’s taxation year ending on or after December 31, 2021 and for subsequent taxation years, could potentially affect this favourable estate planning instrument.

With the new rules, all Canadian resident express trusts must file a T3 return annually, even in situations where the trust is inactive or has no income in a year. There are certain trusts that are exempted from this new rule.

With the new disclosure regime, the bare trustee will have to provide information about each settlor, trustee, and beneficiary of the bare trust such as their name, address, date of birth, jurisdiction of residence, and taxpayer identification number.

The new regime also includes additional penalties for failing to file the T3 return, if the failure to file the return was made knowingly, or due to gross negligence.

A short reprieve is available to bare trustees until the proposed legislation receives royal assent, but bare trustees would benefit from knowing these upcoming changes to plan accordingly.

Thank you for reading.

Endrita Isaj