Understanding Bare Trusts in alberta
Givens LLP | OCT 19, 2023
Holding assets can come with as many risks as rewards. When it comes to real property (such as land, real estate, or valuable hardware), there are cases where you will want to separate it from your personal or business name.
Whether it’s for privacy, tax purposes, or to segregate parts of your business into transferable titles, having a second party “hold” onto your assets might be a good idea. On the other hand, simplifying multiple owners into one name might streamline real estate deals when it comes to determining ownership.
Common questions we hear are:
“If someone is holding my property, can’t they do something to ruin it?” Or, “If there are appreciations in the asset, will they be able to claim them as their own?”
This is not necessarily the case—but this is where a bare trust comes into play.
What is a Bare Trust?
The short version: a bare trust is your best bet for creating a no-nonsense agreement that gives you power over your property without the limitations of conventional ownership. Think of it like your partner holding onto your tray of fresh-baked cookies so you don’t eat them all at once. They’re still your cookies. Someone else is just holding them.
To understand how establishing a bare trust with a Chartered Professional Accountant can help you grow your business without accruing additional taxes, we’ll look first at different types of trusts to understand where a bare trust could help you most. If, by the end, you’re looking for help setting one up, great news—we can help!
How is a Bare Trust Different From Other Kinds of Trusts?
The greatest benefit of a bare trust comes down to it giving ownership of assets to the trustee without any decision-making powers. It’s like giving someone a safe without the key—they may hold the assets inside, but they won’t be able to use them without your explicit direction.
Bare Trust vs. Discretionary Trust:
In a discretionary trust, the trustee has a degree of flexibility and can make decisions about distributing assets among a group of beneficiaries. The trustee can use their judgment to determine which beneficiaries utilize what and when. In a bare trust, however, the trustee has very limited control over the trust assets. The beneficiary is considered the true owner and often has the absolute right to instruct the trustee on how to manage assets. No wiggle room.
Bare Trust vs. Revocable Living Trust:
A revocable living trust is a flexible trust arrangement that is often used for estate planning purposes. The person who creates the trust (known as a grantor) can change it during their lifetime and typically acts as the trustee until their passing. After this grantor’s death, the trust becomes irrevocable and is administered according to its terms. This is different from a bare trust, where the terms are simple (often as short as one page), transparent, and concerned with holding assets rather than managing them.
Bare Trust vs. Family Trust (or Living Trust):
A family trust (also known as a living trust) is a comprehensive agreement involving multiple beneficiaries, such as family and community members. It can be used for a wide range of estate planning and asset protection purposes, often in conjunction with tax strategies. A bare trust is almost always simpler in structure and purpose, often with a single beneficiary holding total control of the assets—you!
Bare Trust vs. Charitable Trust:
A charitable trust is set up to benefit a charitable organization or cause. The trustee must use the trust assets for philanthropic purposes, and the beneficiaries are the charitable recipients rather than individuals. A bare trust, however, typically involves individual beneficiaries for the primary purpose of safeguarding assets for their benefit with little-to-no trustee discretion.
Of course, a bare trust can always be incorporated alongside these other types of trusts. It all comes down to planning the future you want!
Setting Up a Bare Trust in Alberta—Givens LLP Can Help!
Once you’ve determined the assets you would like held in trust, the criteria of a bare trust can typically be laid forth in a brief, one-page agreement between the trustee and the true owner. Working with your lawyer and a full-service accounting firm like Givens LLP can help you plan and execute trusts of any kind while ensuring compliance with all CRA requirements.
For instance, a bare trust will allow you to take advantage of numbered companies by keeping the true owner’s identity out of the public eye. This trustee or group of trustees will have no power to exercise over the assets without the explicit guidance of the owner. Despite this hands-off strategy, any capital gains, sale profits, or interest generated by these holdings will be the responsibility of the true owner to declare. This means you and your accountant will have to be as diligent with the assets as you would be if they were in your own name and portfolio.
Canadian Reporting Requirements for Bare Trusts
Due to the complexities that can arise from even simple bare trusts, we highly suggest speaking with one of our tax experts to ensure your arrangement is compliant and to the benefit of your business. Like much of life, mistakes can get pricey. Not reporting your bare trust can trigger a penalty of $25 per day for up to 100 days ($2,500 once the return is 100 days late). Furthermore, negligent non-reporting or a false report can earn your business a penalty of 5% of the highest value of the trust throughout the year with a minimum fine of $2,500. Yikes!
As of December 5th, 2022, there have been updates to the reporting requirements of Canadian bare trusts. Under Bill C-32, trusts with tax years ending on December 31, 2023, and onwards will require their trustees to file an annual T3 trust return tax for years after December 31, 2023. After year end, the trustee has 90 days to file their trust return.
That’s not all—in accordance with the new regulations, trusts will also need to provide on T3 Schedule 15, "Beneficial ownership information of a trust," additional information about their stakeholders. This information will include the names, addresses, dates of birth, jurisdictions of tax residence, and tax information numbers.
Trustees, beneficiaries, settlors, and anybody else with the power (by the provisions of the trust or a related agreement) to exercise control or overrule trustee decisions about the appointment of capital or revenue for the trust (a protector, for example) are examples of the stakeholders the CRA will want to see relevant information from.
There are exemptions, however, including trusts that have been in existence for less than three months, or those that hold less than $50,000 in deposits, government debt obligation, and listed securities throughout the tax year.
It’s a lot to take in, but you can trust your Givens CPAs to ensure that your compliance is top-notch and that your tax returns leave no money on the table.
Is a Bare Trust Worth It?
With the right conditions and guidance from our tax experts, absolutely! As one of Edmonton’s best chartered accounting firms, we’ve been helping local businesses grow for over 75 years, and trusts of all kinds are just one of the many tools we use to ensure you’re never leaving money on the table. Let us handle the details while you focus on what you do best—growing your business.
Building a Bare Trust with Givens
If you’re looking for greater anonymity in your holdings, are ready to simplify your shared real estate titles, or want to put assets in trust for a minor, we’re ready to help you plan and execute a bare trust. Book a call with us today to get started on a trust and tax strategy that puts your future in focus.