Estate Planning
Nov 29, 2024
7 Critical Trust Fund Mistakes Parents Must Avoid in 2024
Setting up a trust fund? Learn the biggest mistake parents make and ensure your child's financial security with expert guidance.
A bare trust, also known as a simple trust or naked trust, is a legal arrangement in Canada where a trustee holds legal title to assets for the benefit of another person, known as the beneficiary. The key feature of a bare trust is that the beneficiary has absolute entitlement to the assets and any income they generate.
In a bare trust, the trustee's role is limited to holding the legal title and following the beneficiary's instructions regarding the trust assets. The beneficiary has full control over the assets and can demand their transfer at any time.
This simple structure makes bare trusts distinct from other types of trusts in Canadian estate planning. The beneficiary effectively owns and controls the assets, while the trustee acts as a mere nominee or agent.
Bare trusts stand apart from other trust types due to their simplicity and the level of control given to the beneficiary. Unlike discretionary trusts or family trusts, where trustees have decision-making power, trustees of a bare trust have no active duties or discretion in managing the trust assets.
In contrast to living trusts, which often involve ongoing management and distribution decisions by trustees, bare trusts provide immediate and absolute entitlement to the beneficiary. This means the beneficiary can access and use the trust assets as they see fit, without needing approval from the trustee.
Living trusts in Canada offer different advantages, such as potential probate avoidance and ongoing asset management. However, they typically involve more complex structures and ongoing administration compared to bare trusts.
What You Need to Know | Bare Trust | Living/Family Trust |
---|---|---|
Who controls the assets? | Beneficiary has full control | Trustee makes all decisions |
Who manages the property? | Beneficiary gives directions | Trustee manages independently |
Who pays the taxes? | Beneficiary reports all income | Trust files its own taxes |
How complex is it? | Simple - minimal paperwork | Complex - regular administration |
What does it cost? | Low - basic setup fees | High - ongoing management fees |
Can terms be changed? | No - fixed structure | Yes - can be modified |
How private is it? | Very - only trustee name public | Less - requires documentation |
Bare trusts offer several advantages, making them a strategic choice:
Bare trusts provide Canadians with an incredibly versatile tool. They can be incorporated into countless personalized estate or asset management plans, but here are some of the more common situations where the benefits can be particularly advantageous:
Key Features of Bare Trusts
There are several distinctive features which differentiate bare trusts from other types of trusts. Most of these center around the aspect of ownership and the roles of the trustee and beneficiary. Taking the time to understand these key traits is an important step for anyone considering a bare trust for their financial or estate planning needs.
In a bare trust, all income – such as interest, dividends, and all capital gains generated by the trust's assets – are attributed directly to the beneficiary. The trust itself does not pay taxes on these earnings, but they are still attributed to the beneficiary for tax purposes.
Beneficiaries must report the income and capital gains from the trust’s assets on their personal tax returns. They are taxed on this income at their individual tax rates. Since the income and gains are taxed at the beneficiary’s level, there is no risk of double taxation at the trust level. This is not the case for every kind of trust, where different tax rates may apply, which is another benefit to these trusts.
It is important to note that because all interest is attributed to the beneficiary, this also means that the beneficiary is equally responsible for correctly reporting the income, and any tax liability falls on them rather than the trust.
Recent tax law amendments in Canada also impact reporting obligations, so be sure to seek the help of a financial professional for complete certainty as to which forms are required. Both trustees and beneficiaries must adhere to tax laws regarding bare trusts. This includes accurate reporting of income and capital gains, and adherence to current tax laws and trust reporting requirements.
The Canada Revenue Agency (CRA) has announced that bare trusts will not be required to file a T3 Income Tax and Information Return (T3 return) or Schedule 15 for the 2024 tax year, unless specifically requested by the CRA. This continues the exemption previously granted for the 2023 tax year.
Proposed Changes for 2025 and Beyond Under proposed legislation, significant changes to bare trust reporting requirements would take effect starting with the 2025 tax year:
Exemptions from Filing T3 Returns Starting in 2025, bare trusts would be exempt from filing T3 returns if they meet any of these criteria throughout the year:
T3 Schedule 15 Requirements and Exemptions Starting with December 31, 2024 tax years, expanded exemptions from Schedule 15 filing include:
Meeting Schedule 15 exemption criteria does not automatically exempt a trust from T3 return filing requirements.
Non-Compliance Penalties Failure to meet filing requirements can result in significant penalties:
Filing Deadlines
While bare trusts offer a simpler solution for asset management and estate planning in Canada, understanding the new reporting requirements is crucial for your financial success. Whether you're considering privacy protection, tax efficiency, or streamlined asset transfers, a bare trust might be the right solution for your estate plan.
Ready to explore if a bare trust aligns with your estate planning goals? Our estate planning specialists will help you:
Book your free consultation today with our estate planning experts to create a strategy that protects your assets and secures your legacy.
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