Bare Trusts in Ontario
A bare trust is the simplest form of trust that allows the beneficial owner(s) of property to retain full ownership and control of the property while registering legal title with someone else. A bare trust cannot be used to avoid taxes, but it can be used to facilitate estate planning and real estate transactions.
Bare Trusts in General
A bare trust[i] is a type of trust[ii] in which a trustee holds property without any obligations except to convey title to the property upon demand to the beneficiary or to a third party as directed by the beneficiary. The trustee has no right to use, control, manage, or enjoy the property, and he or she has no personal responsibility for claims or charges against the property. The trustee simply holds legal title to the property and beneficial ownership remains with the beneficiary. Unlike in other trusts, the trustee has no independent powers, discretions, or responsibilities.[iii] The bare trust is akin to an agency relationship.
As bare trustees are only acting as agents for their beneficiaries, [iv] bare trusts are disregarded under the Canadian Income Tax Act.[v] The transfer of property to a bare trustee does not usually constitute a “disposition,” and all income earned on that property and any capital gains belong not to the bare trustees but to the beneficiaries. As such, the beneficial owners must report any income from the property on their own tax returns. A trustee of a bare trust does not currently have to file a trust tax return, but starting in 2021, the trustee will have to file an annual T3 return if in certain circumstances.
Although it is not necessary, it is prudent to execute a written legal agreement when creating a bare trust to evidence the relationship and to more easily enable the transfer of legal title. The document should show, among other things, that the beneficial owner (or its lender) provided all the purchase money for the property and that the bare trustees’ only obligations are to act on any directions from the beneficiary.
A bare trust can be used for estate planning. A testator can register his or her estate trustee as joint title holder to property while having him or her to sign a non-beneficial acknowledgement. The estate trustee will be a bare trustee until the testator dies. With this arrangement, the testator retains full control of the property before his or her death. When the testator dies, the estate trustee will be able to deal with the testator’s property without having to first obtain a Certificate of Appointment of Estate Trustee with a Will (“probate”), which can take up to six months in Toronto. Another benefit is that estate administration tax can be avoided, assuming either none of the testator’s other property requires probate, or the testator had two wills drafted appropriately.
A bare trust can also be used to hold real estate. A real estate business can retain beneficial interest in land, while a corporation known as a “nominee company”, holds legal title to that land. This is usually done because a nominee company provide anonymity as only it is listed in the Ontario land registry. Even if anonymity is not sought, it allows for a single legal title holder when there are several beneficial owners.
This blog is for general discussion purposes only and cannot be relied on for legal or tax advice. If you require advice or if you have questions about an existing bare trust, please contact us at firstname.lastname@example.org or visit us our office in 350 Wellington Street West, Unit 205, Toronto, Ontario.
[i] A bare trust is also known as either a naked trust or a simple trust.
[ii] A trust is an equitable obligation created by a settlor binding a person (a trustee) to deal with trust property he or she controls for the benefit of the beneficiaries. The settlor, trustee, and beneficiary can be the same person.
[iii] Trident Holdings Ltd. v. Danand Investments Ltd., 64 O.R. (2d) (Ont. C.A.).
[iv] De Mond Jr. v. The Queen, 1999 CanLII 466 (TCC)).
[v] Income Tax Act, RSC 1985, c 1 (5th Supp), ss. 104(1).