Bare Trust Basics
At Marigold Law Group, we understand that navigating the legal landscape can often feel like unraveling a complex puzzle. One area that frequently raises questions is the concept of bare trusts – what exactly are they, and how are they created?
In this blog post, we’ll explore the basics of bare trusts and discuss recent developments regarding reporting requirements by the Canada Revenue Agency (CRA).
What is a Bare Trust?
A bare trust, also known as a simple trust, is a legal arrangement in which a trustee holds assets on behalf of a beneficiary. Unlike other types of trusts that may involve complex legal structures and fiduciary responsibilities, bare trusts are straightforward. The trustee’s role is limited to holding legal title to the assets, while the beneficiary retains beneficial ownership and control.
For example, children cannot have bank accounts solely in their own names. If a parent opens a bank account to store money for the child from birthdays, family income, or other sources, but only holds it in the account until the child asks for it, that is considered to be a bare trust arrangement.
How Are Bare Trusts Created?
One common misconception is that bare trusts are only established through formal legal agreements. While this is one way to create a bare trust, certain arrangements may inadvertently create a bare trust legally without requiring explicit documentation.
Jointly held bank accounts and real estate properties where one person holds legal title in order to co-sign the mortgage can constitute bare trusts. It’s important to understand these details to avoid unintended legal issues, such as being flagged for not following CRA reporting requirements.
The CRA’s Recent Decision
In recent years, the CRA has increased its focus on transparency and compliance in the realm of trusts. As part of these efforts, the agency proposed new reporting requirements for bare trusts for the 2023 tax year, aiming to enhance tax enforcement and prevent potential abuse.
However, as written this could have required reporting from people who have joint bank accounts with their children or parents, people who have co-signed on their family member’s home mortgage, and others who did not realize that they were entering into a bare trust agreement while going about their daily lives.
Recognizing the challenges faced by taxpayers and tax professionals in adapting to these changes, the CRA has announced a postponement of the bare trust reporting requirements for the current fiscal year. If they had not, anyone who did not realize they were the trustee of a bare trust could have been responsible for penalties of up to $2500 in late filing fees and even more in cases of “gross negligence.”
This decision provides welcome relief for individuals and businesses grappling with the complexities of trust administration and taxation. The CRA will be providing further guidance over the bare trust reporting requirements over the coming months, which allows more time for clarification and gathering necessary information.
Seeking Legal Guidance
These ongoing changes and their wide impacts on Canadians underscores the importance of staying informed about evolving regulatory developments and seeking professional guidance to ensure compliance with applicable laws and regulations. While the postponement of reporting requirements may offer temporary reprieve, it’s essential to remain proactive in addressing your legal obligations and safeguarding your interests.
At Marigold Law Group, our experienced team can help with your issues in trust law and taxation, offering personalized guidance tailored to your specific needs and objectives. Whether you’re considering establishing new trust, navigating tax implications, or addressing compliance concerns, we’re here to provide comprehensive support every step of the way.
For some more information about the basics of trusts in Canadian law, check out Understanding Trusts: An Introduction by Marigold Law Group.