Do I have a bare trust?

Leanne Kaufman:

What is a bare trust and is it possible that you have one without even knowing it? The new Canada Revenue Agency reporting requirements for bare trusts are creating a lot of confusion for Canadians, in part because the definition may be more broadly sweeping than anyone understood. Part of this confusion is the very fact that there is no definition of a bare trust in the Income Tax Act. A bare trust can occur deliberately as a planning strategy or may arise unbeknownst to its creators by doing something like adding a child’s name to a bank account or the joint ownership of a real estate property. This potentially broad interpretation means that many Canadians could end up inadvertently facing some tax filing obligations they didn’t even know they had.

Hello, I’m Leanne Kaufman, and welcome to RBC Wealth Management Canada’s Matters Beyond Wealth. With me today is Paul Taylor, a partner at the law firm of Borden Ladner Gervais, or BLG, with the firm’s Private Client Group in Ottawa.

Paul, thanks for being here with me today to help provide some clarity on these recent tax filing confusion rules around bare trusts and why this matters beyond wealth.

Paul Taylor:

Thanks so much for having me.

Leanne Kaufman:

So Paul, can you give us some examples to understand what I’m talking about here when I ramble on about bare trusts and why people use them?

Paul Taylor:

Sure, and I think one of the things to keep in mind is that a bare trust is a bit different from what we would think of as a normal trust, right? A normal trust, we think somebody maybe is doing some family estate planning and there’s a big 20-page trust deed and all that. A bare trust is a bit different.

At the end of the day, it’s an agency relationship, which is where somebody does something for someone else, except the legal title is held by the agent. So the simplest form of that is I hold a piece of real estate for you, but I can only deal with it the way you tell me to deal with it. I can only sell it when you tell me to, I can only mortgage it if you tell me to, and I can only really allow anybody to do anything the way that you, as the beneficial owner, are telling me to.

So why would somebody do this? At the end of the day, it’s usually one of two things. It’s either that they want to simplify the beneficial owner’s life a bit maybe by having someone else do the heavy lifting, doing the work on some property, or it’s maybe to simplify things for tax or regulatory reasons.

A good example is in Ontario, we have relatively high probate fees at 1.5 percent. So some people will put their house in a nominee corporation and then they’ll direct how that is dealt with themselves, so that’s a bare trust relationship, and then they can do some other planning that would exclude that house from probate.

Another situation that arises sometimes is maybe a car would be in somebody else’s name or parents on title for the home of their child to qualify for a mortgage.

I did want to flag that not all of these things actually work the way you want them to. There are sometimes rules that a lender might have or that an insurance company might have or that somebody else might have that frustrate this working properly. But that’s what people often do for bare trust planning, and it’s a lot more common in higher probate fee jurisdictions, like Ontario and B.C. And my understanding, I’m not a Quebec lawyer, but my understanding is that bare trusts don’t really work in Quebec.

Leanne Kaufman:

Right. It’s got a bit of complication to it if you don’t understand exactly what it is that you’re doing, although it’s not an uncommon planning strategy, especially in those high-probate provinces, right?

Paul Taylor:

Exactly, yeah.

Leanne Kaufman:

So there was a fair bit of media earlier this year about bare trusts and the tax return filings that were rules that were coming into place for the first time. What was this all about?

Paul Taylor:

Yeah. So one of the reasons that people liked bare trusts historically is that, for the most part, they’re ignored under the Income Tax Act. So at the end of the day, if I’m holding property in bare trust for you, under the Income Tax Act, it’s treated just as though you own it.

However, there were new trust reporting rules that were implemented and they were effective for the 2023 tax year, so for folks who would’ve been filing their returns this spring. And in that, there was a requirement, in most cases, that bare trusts actually have to file a return. Even though there’s no tax to pay, there’s a return to be filed, which means you’ve got to get a trust information number for the bare trust and you’ve got to get the social insurance numbers of all the beneficiaries and the trustees and all the addresses and all that stuff. So it’s a lot of compliance work that didn’t exist before, and I think it surprised a lot of people. As you said, there are a lot of situations where people didn’t really know that they were in a bare trust situation.

This podcast is timely because just a couple of weeks ago*, the government came out with new proposed legislation, and we’re currently in the consultation period, that would change a lot of these rules yet again. In this case, I think it’s likely for the better. So what happened last time is just before the filing deadline, the CRA came out and said, “Okay, we realize this is a lot for a lot of people. In most cases, you’re not going to have to file,” which was a nice relief, but it would’ve been good if it was more than three days before the filing deadline or whatever it was, and a lot of people had already filed by then, right?

The new legislation, I think, gives us a bit of a chance for a breath. So essentially what it says is the 2024 tax year, there’s not going to be any bare trust filings, so no need to worry about that. Then the 2025 tax year and forward, there’s a bit of a new regime that’s similar, but with some tweaks. Assuming that those are passed without material changes, this next year, we can all take a breath, have a better look at our planning, adjust things if we need to, and so long as you’re adjusting it before the end of 2024, it’s not going to be caught by the new rules.

Leanne Kaufman:

So one of the areas of confusion before the pause was put on the CRA rules, like you said, three days before they were supposed to have been filed, was around joint accounts. And of course joint accounts are incredibly popular in Canada, at least outside of Quebec, especially parents and children. And one of these areas of confusion was that the media was suggesting at least that these joint accounts would also be considered a bare trust and require a tax return.

So what’s the latest on that issue?

Paul Taylor:

Yeah. So under the old, well, the old new rules, if that makes sense, the old version of the new rules, there’s some situations would be required where the joint owner was holding the funds for somebody else, right? So think, for example, a situation where a child’s on a joint account with their parent, an adult child. Now, for a number of reasons, I don’t generally recommend that kind of planning, but it is reasonably common and it could have been caught.

Under the proposed new rules, it’s possible it still might apply, and we can go into a bit about what those say in a minute, but there’s actually a general new exemption for trust reporting that applies to all trusts, not just bare trusts, for what’s called a related party trust. And so that’s where the trustee is related to the beneficiary and there’s less than $250,000 of assets, so long as it’s publicly traded securities, GICs, bank accounts, stuff like that.

So if you’ve got this situation that I mentioned, if I’m on a joint account with my parents to help them deal with their bills and things like that, and really we’re looking at that as a bare trust situation, so long as the account is less than $250,000, we’d fall under that exception, so that would be good.

Leanne Kaufman:

Oh, well, that’s helpful. Yeah, because I can imagine, I mean, certainly my reaction when I heard that was, “How on earth is CRA ever even going to look at the tax returns for the probably millions of joint accounts that are out there that might’ve ended up being implicated?” So that might be some welcome relief, for sure.

What about the definition of bare trust? I mean, I think one of the areas of complication was that it wasn’t really a defined term. So has that been addressed in this new draft legislation you’re talking about?

Paul Taylor:

It has to a large extent. So it used to be that the language, and definitely not a definition by any way that you or I would ever refer to a definition. It did describe it as, “An arrangement under which a trust can reasonably consider to act as agent for the beneficiaries under the trust with respect to all dealings with all the trust property.” So I said that quickly because if I said it slowly, it still wouldn’t make that much sense.

One of the nice things about the new proposal is that it breaks it down into sort of more digestible bits and deals with—it’s almost like a checklist, like, “Do you fall under A, B, and C? And if you do, then we’ve got what they’re now calling a deemed trust instead of a bare trust.”

Essentially, there’s a few other boxes, but you’ve got to have somebody who’s legal owner of the property who’s held for the benefit of another person or more people, the legal owner is reasonably considered to be agent—so that agency thing we talked about at the beginning, and maybe a few other nuances. But it breaks it down in such a way that I think you can actually digest it and look at a certain situation and say, “This is a deemed trust,” or, “this is not a deemed trust.” Whereas before, I think there was some confusion over what would fall into and what wouldn’t fall into the bare trust definition.

There are a couple exceptions that I’m just going to note because I think they’re important:

• The first is where all the legal owners are also beneficial owners.
  • For example, if I am the bare trustee and me, my brother, and our childhood friend are all the beneficial owners of, I don’t know, shares in a company or a cottage property or something, that situation would be accepted if the legal owner is also a beneficial owner.
• It’s also if the legal owners are related to each other and the property is real property that would qualify for a principal residence exemption.
  • So this example that you’ve brought up before where you’ve got a parent who’s on title so we can qualify for a mortgage for a child. The parent is really bare trustee for their interest, it really is their child’s interest, and that’s not going to be caught here. So that’s great. That’s going to exclude a bunch of people.
• Then another one is where a legal owner’s holding for the property for the benefit of their spouse and it would qualify as a principal residence. So again, a situation where only one’s on title, you’d be covered there.
• There’s also a couple more business-oriented things, like partnership situations or things like that.

Leanne Kaufman:

So it sounds like under the new legislation, if it goes through the way they’ve proposed it, it will be this sort of checklist of your circumstances as opposed to a review of your assets per say and the way you’re holding title. Is that fair? I mean, how would you suggest that people take a look at their own situation to see if they’re caught?

Paul Taylor:

Yeah, so I think when you think also about the broader exclusion that I talked about before with the $250,000, one of the things that’s excluded there is personal use property. So a lot of the questions people had were, “Well, what if I bought a cell phone for my kid and it’s in my name?” like silly things like that that should never be caught by this. So that stuff, you don’t have to worry about that.

Leanne Kaufman:

Sorry, personal use property doesn’t mean real estate. It means personal items, you’re saying, in this case?

Paul Taylor:

Exactly, yeah. It generally means that kind of property. The intention here, and with the other exemptions for real estate, the intention here I think is not to go after those smaller things. There are still going to be a lot of business situations that’ll be captured. A lot of real estate situations where it’s not a principal residence will be captured. So those are the types of things someone should look at. Or where there’s assets over $250,000 that are in this kind of situation.

But I think for your average Canadian can, I think, take a sigh of relief and say, “Okay. I need to maybe look at two different assets and think, ‘Is this something that is covered?'” versus all these various scenarios. I know you read them as well, I’m sure, but there were all kinds of articles hinting at the extremes of what could be caught by this, and I think the new legislation does a better job at sort of cutting those things out.

Leanne Kaufman:

Ah, that’s good. Okay. Well, hopefully it all becomes clear. And anyway, it’s a 2025 problem, I think is what you’re telling me.

Paul Taylor:

It is now a 2025 problem. I would say it might be a good late-2024 problem because if you want to make any changes to your structuring, you want to do it before December 31st of this year so that you’re not caught on the 2025 year.

Leanne Kaufman:

Right, okay. So putting aside some of the nuanced, inadvertent, bare trust issues for a minute, the holding accounts joint with your parents and that kind of thing, you started us off by saying that bare trusts are sometimes used to achieve particularly probate planning, but some sort of planning goal. So let’s say that that’s actually we’re looking at a situation where someone is trying to achieve something as opposed to falling into something.

What sort of other options are there to bare trust to achieve a similar sort of goal?

Paul Taylor:

Sure. Yeah, and as I mentioned at some point, I don’t do a lot of bare trust planning because I think at the end of the day, if you’re looking at something like probate planning, probate fees are 1.5 percent, even in the high-tax jurisdictions, and they can be almost nothing in other jurisdictions. So certainly it’s not nothing, but it’s a one-time tax, and if we can limit its application to the death of one spouse or if we can limit its application to just a few assets, that’s probably a good result versus the risks of exposing someone to vulnerability. A lot of sort of bare trust planning or even joint account strategy planning, a lot of that stuff involves giving up control of your own assets. For vulnerable seniors and other Canadians, that’s maybe not a great option in my view.

So a couple alternatives that we have:

• The first one is just if you want to just make sure that someone’s able to deal with your property, use a power of attorney. A power of attorney for property or its equivalent in the various jurisdictions, it allows someone to act on your behalf. They can manage your assets and all that kind of stuff, but the assets stay in your name and the attorney should be keeping them in your name, and so you don’t have that same level of vulnerability. That’s obviously a very powerful document, but I think that’s a good one.
• We have options, if you’re over 65, like alter ego trusts or joint spousal trusts where you can put assets into a trust, it’s fairly tax-neutral from an income tax perspective, and you’re still the only one who can benefit from it, but it’s generally excluded, at least in Ontario and I believe B.C., from probate fees.
• RBC offers a great product, if you’re eligible for it, called the JGBRS account, where you can have the lifetime interest in the property, but when you die, it goes to other people so that can be worthwhile.
• Or if you’ve got registered plans, TFSAs, insurance products, we’ve got beneficiary designations.
• And then you’ve also got some situations where you can use a multiple Will, particularly in Ontario and B.C.

So we’ve got a big toolkit, and my general advice is you don’t want just avoiding probate to be the end-all and the be-all of your planning. It’s got to be a broader discussion than that. Right?

Leanne Kaufman:

Yeah, with really good consideration to the downstream potential impacts, like you said. It’s one thing to have convenience or avoid probate, but doing it with eyes wide open as to the full gambit of the risks and consequences, I think, is really great advice.

So Paul, what advice, I know you said you don’t really use this, bare trusts in particular, as one of the major tools in your particular toolkit when you’re working with clients, but what advice have you been giving to clients about all of this? And maybe it’s changed recently with the new legislation.

Paul Taylor:

I mean, certainly last spring, there were a number of conversations I had with people that was just sort of working through trying to identify, “Are we even captured by the rules?” And I do think if you know that you’ve got a situation where title is held by somebody who’s not the person who actually uses or pays for the property, that’s a situation where you want to have a look and just see if you’re going to be captured. It’ll be helpful, I think, that there will be some better clarity under the new rules that will sort of let people figure that out. I do think it’ll be an easier determination at least.

And the other piece, I think, is one of the things that we saw just for trust planning generally is it used to be that you might put your nieces and your nephews and all kinds of different people as beneficiaries. With all the reporting rules and the requirements to gather addresses and social insurance numbers and all that, I’ve definitely seen a lot of collapsing of the groups of people that you’re including as beneficiaries in a trust to really just those key people that you want to include. You’ve got to have sort of the holistic look at everything and say, “What are the reasons for doing this?” And there could be very good reasons to have something in bare trust, but for your average person, probably not.

Leanne Kaufman:

Right. And another good reason to make sure there is holistic advice with a professional who understands this area of the law very deeply if you’re getting into this kind of level of complexity in your planning.

So Paul, if you hope listeners remember just one thing from this conversation, because we’ve covered a lot of ground here, what would that one thing be?

Paul Taylor:

I mean, I think it’s tax rules change, and so don’t let the tax tail wag the planning dog. You want a robust plan that’s going to work even if things do change at the margin like they have been this past while.

Leanne Kaufman:

Yeah, great advice. I think that’s very, very sound.

Well, thank you, Paul, so much for joining us today to help me better understand these moving target rules when it comes to bare trusts and their tax reporting implications and why all this matters beyond wealth.

Paul Taylor:

Oh, it’s been a pleasure. Thank you.

Leanne Kaufman:

You can find out more about Paul at BLG.com.

If you enjoyed this episode and you’d like to help support the podcast, please share it with others, post about it on social media, or leave a rating and a review.

Until next time, I’m Leanne Kaufman. Thank you for joining us.

Outro speaker:

Whether you are planning for your own estate, the needs of your family or business, or you are an executor for a loved one’s estate, we can help guide you, simplify the complex, and support your life’s vision. Partner with RBC Royal Trust and ensure your legacy will thrive for generations to come. Leave a legacy, not a burden™. Visit rbc.com/royaltrust.

Thank you for joining us on this episode of Matters Beyond Wealth. If you would like more information about RBC Royal Trust, please visit our website at rbc.com/royaltrust.

*Episode was recorded on August 27, 2024