Bare Trusts in Canada: in general, and in Canada.

Introduction

A bare trust is a simple yet effective vehicle for holding assets in Canada, offering a transparent and flexible approach to asset management. This article explores the functionality, characteristics, and general guidelines of bare trusts, along with their provisions under Canadian law. By understanding how bare trusts work, individuals can utilize them for estate planning, investment management, and asset protection.

What is a Bare Trust?

A bare trust is a trust in which the trustee holds property on behalf of a beneficiary, who has the absolute right to demand the transfer of that property at any time. Unlike more complex trust structures, the trustee’s role is largely administrative, without discretion over the management of the trust assets. This arrangement empowers the beneficiary with complete control over the assets held in the trust.

Key Components of a Bare Trust

1. Trustee: The individual or entity responsible for holding and managing the trust assets. In a bare trust, the trustee must act according to the beneficiary’s instructions.
2. Beneficiary: The individual or entity that benefits from the trust, possessing the right to the assets and income generated.
3. Trust Assets: The property or investments held within the trust, which can include real estate, stocks, bonds, or cash.

Characteristics of Bare Trusts

1. Simplicity

Bare trusts are straightforward to establish and manage. The trust document clearly outlines the trustee’s responsibilities, the beneficiary’s rights, and the assets held. This simplicity makes bare trusts an appealing option for individuals seeking minimal administrative burden.

2. Control

The beneficiary retains significant control over the trust assets, with the authority to direct the trustee to transfer or manage the assets. This characteristic makes bare trusts particularly attractive for individuals who want direct involvement in their investments.

3. Transparency

The structure of a bare trust offers a high degree of transparency. The rights of the beneficiary and the assets held are clearly defined, reducing potential disputes regarding management and control.

4. Tax Implications

Income generated by the trust is typically taxed in the hands of the beneficiary, allowing for potential tax planning opportunities. This can be especially beneficial for minors or individuals in lower tax brackets, as the income can be distributed to minimize overall tax liability.

5. No Discretionary Powers

Bare trusts lack discretionary powers for the trustee, ensuring that beneficiaries have a clear and absolute right to the assets. This structure contrasts with discretionary trusts, where trustees have the authority to decide how income and capital are distributed.

Functionality of Bare Trusts

Bare trusts serve various purposes, making them versatile financial tools. Here are some common functions:

1. Asset Protection

Bare trusts can help protect assets from creditors. By holding assets in a trust, beneficiaries may shield them from legal claims or bankruptcy proceedings, as the assets are technically owned by the trust.

2. Estate Planning

Bare trusts are widely used in estate planning. They enable individuals to transfer assets to beneficiaries while retaining control during their lifetime. Upon death, assets can be distributed directly to beneficiaries without going through probate, simplifying the process and potentially reducing costs.

3. Managing Investments for Minors

Parents or guardians often establish bare trusts to manage investments on behalf of minors. The trust can hold assets until the minor reaches a specified age, at which point they gain full control.

4. Tax Efficiency

Bare trusts can be structured to leverage tax efficiencies. Income generated within the trust can be distributed to beneficiaries in lower tax brackets, minimizing overall tax liability.

General Guidelines for Setting Up a Bare Trust

When establishing a bare trust in Canada, several guidelines should be considered:

1. Drafting the Trust Agreement

A clear and comprehensive trust agreement is essential. This document should outline:

• The roles and responsibilities of the trustee.
• The rights of the beneficiary.
• The assets held in the trust.
• The process for transferring assets to the beneficiary.

2. Selecting a Trustee

Choose a trustee who is trustworthy and capable of managing the trust’s administrative tasks. The trustee should understand the beneficiary’s needs and wishes.

3. Defining the Trust Assets

Clearly identify the assets to be held in the trust, such as real estate, cash, or investments. Accurate documentation is crucial for establishing ownership and ensuring smooth management.

4. Understanding Tax Implications

Consult with a tax professional to understand the tax implications of the bare trust structure. Since income generated by the trust is taxed in the hands of the beneficiary, it’s important to strategize around potential tax liabilities.

5. Record Keeping

Maintain thorough records of all transactions, distributions, and communications related to the trust. This documentation is vital for transparency and may be necessary for tax reporting.

Provisions and Regulations in Canada

1. Income Tax Act

In Canada, the Income Tax Act governs the taxation of trusts, including bare trusts. Under this act, income earned by the trust is attributed to the beneficiary, meaning they must report it on their personal tax return. This provision allows for potential tax planning strategies.

2. Trust Property

The property held in a bare trust is not subject to the same restrictions as property owned outright by the beneficiary. For instance, assets in a bare trust may be shielded from creditors in certain circumstances, providing an additional layer of protection.

3. Provincial Regulations

While the Income Tax Act applies federally, trusts may also be subject to provincial regulations. Each province may have specific rules governing trusts, including reporting requirements and tax implications. It’s essential to consult legal and tax professionals familiar with the laws in the relevant province.

4. Succession Planning

Bare trusts can play a significant role in succession planning. By establishing a bare trust, individuals can designate beneficiaries and streamline the transfer of assets upon their death, helping to avoid delays and costs associated with probate.

5. Age of Majority

When using a bare trust to hold assets for minors, it’s crucial to consider the age of majority in the respective province. Once the beneficiary reaches this age, they gain full control over the assets, necessitating careful planning for this transition.

Conclusion

Bare trusts are a valuable tool in Canadian estate planning, investment management, and asset protection. Their simplicity, transparency, and flexibility make them an attractive option for individuals looking to manage assets efficiently. Understanding the characteristics, functionality, and guidelines surrounding bare trusts is essential for anyone considering this structure.

With careful planning and professional advice, bare trusts can help individuals achieve their financial goals while providing benefits for their beneficiaries. As with any financial strategy, consulting with legal and tax professionals is crucial to ensure compliance with regulations and to optimize the benefits of using a bare trust. By harnessing the potential of bare trusts, individuals can secure their assets and simplify their financial management, ultimately paving the way for a more organized and efficient approach to wealth transfer and protection.

This article is only for the purpose of education and awareness. Please consult a licensed professional before taking a decision.

-Raman Nagpal

B.Com, CA, CMA, DISA