Bare Trusts in Real Estate: When to Use Them and How They Affect Taxation
Bare trusts can be a useful tool in real estate transactions for privacy and tax neutrality, yet they are often misunderstood or overlooked. Like all tax planning tools, bare trusts come with compliance obligations that property owners should be aware of, especially, in light of recent changes to bare trust reporting requirements in Canada.
What Is a Bare Trust?
The term “bare trust” is not defined in the Income Tax Act. However, subsection 104(1) provides that a bare trust for income tax purposes is a trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.
Essentially, a bare trust is a legal arrangement where one person (the trustee) holds legal title to a property but has no independent authority over it. The trustee must act strictly on the instructions of the beneficial owner(s). In other words, the trustee is simply holding the property on behalf of someone else.
The beneficial owner is the person who truly owns the property and bears all the benefits and risks of ownership. This includes receiving rental income, making decisions about the property, and reporting any income or capital gains for tax purposes.
Why Use a Bare Trust for Your Property?
Bare trusts may be appropriate for practical, administrative, and/or tax planning reasons, including the following:
Privacy
Because land title records are public, holding legal title through a trustee can limit the visibility of the beneficial owner’s identity.
Efficiency
Since beneficial ownership does not change when legal title is transferred to or from a trustee, this can help avoid unnecessary land transfer tax or probate fees in certain situations, depending on provincial rules and how the arrangement is structured.
Flexibility
Bare trusts are often used where the beneficial owner cannot or does not want to hold legal title directly. This may include situations involving minors, joint ventures, corporate reorganizations, or temporary arrangements during financing or closing delays.
What Is the Tax Treatment of Bare Trusts in Canada?
For income tax purposes, a bare trust is generally treated as “look-through.” This means there may not be tax at the trust level. However, income and capital gains from the property will need to reported by the beneficial owner.
What Are the Reporting Requirements for Bare Trusts?
Recent changes under the Income Tax Act introduced expanded trust reporting rules that were initially intended to apply to bare trusts. However, the practical application of these rules has evolved significantly based on administrative guidance from the CRA.
For the 2023 taxation year, although the legislation technically required bare trusts to file a T3 Trust Income Tax and Information Return (including Schedule 15), the CRA announced that bare trusts would not be required to file unless specifically requested.
For the 2024 and 2025 taxation years, proposed changes under Bill C-15 go further. Based on current legislative proposals, bare trusts are not subject to the trust reporting rules at all for these years and are therefore not required to file a T3 return or Schedule 15.
Looking ahead to the 2026 taxation year, the rules may change again. Under Bill C-15, certain bare trusts (referred to as “reportable bare trusts”) may be subject to reporting requirements, depending on the specific criteria set out in the legislation. Additional guidance is expected from the CRA before these rules take effect.
Where a bare trust is required to file, the trustee must generally complete a T3 return and include Schedule 15, which discloses detailed information about the trust’s stakeholders, including trustees, beneficiaries, and individuals who exercise control or influence. This includes personal details such as names, addresses, dates of birth, residency, and tax identification numbers. However, due to the nature of bare trusts, most other sections of the T3 return are typically not applicable, as all income and gains are reported by the beneficial owner.
Although filing may not be required for certain years, the CRA will still accept voluntary filings where submitted.
Given the evolving nature of these rules, property owners and trustees should monitor developments closely and seek professional advice to ensure compliance as the reporting framework continues to change.
Conclusion
Bare trusts can be an effective tool for managing real estate ownership, but they come with important tax and reporting considerations. Property owners should take the time to determine whether a bare trust exists in their situation, understand when a taxable event may arise, and ensure that all reporting obligations are met.
With proper planning and ongoing review, bare trusts can be used effectively without creating unintended tax risks. If you believe a bare trust may apply to your situation, or if you have questions about compliance requirements, seeking professional advice can help ensure that your structure is both effective and compliant.
**Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Bhavika Chadha