Bare trust (also referred to as naked or dry trust) is a legal arrangement in which a trustee holds a legal title to property but has no independent powers or discretion over it. The Trustee here may be considered to be acting as agent for all the beneficiaries under the trust regarding all dealings with regards to all of trusts properties. Here the trustee’s sole duty is to convey legal title to the property on demand while the beneficial owner retains full control and all economic rights over the property or only acting at the direction of beneficiaries; in other words, they do not have any discretion with respect to trust property.

Although in Ontario, Bare Trust does not require a written agreement to be legally valid, the parties conduct can be sufficient to establish the existence of a bare trust between the parties. While not a necessity to create a bare trust relationship, it is most advisable that the terms of the trust be reduced to writing to avoid future litigation as well the risk of CRA deeming it a true trust.

It is also important to reduce the agreement into writing to delineate the role of trustees- specifically, whether they would be acting as true trustees or as an agency of the beneficial owner as the reporting requirements differ. The distinction is also important for determination of proper person required to register for GST/HST if a commercial activity is being undertaken with respect to the property that is the subject of the Bare Trust.

Bare trusts are commonly used to: 

• Maintain anonymity and privacy of the real ownership 
• Estate Planning.
• Gift a minor child or children with property who can’t hold a legal title.
• Hold legal title of a property on behalf of a group of owners in a joint venture or partnership.

In a Bare Trust, income and/or loss is reported by the beneficial owner and not the Trustee. However, CRA recently has started requiring even the Bare Trusts to file T3 returns.

Bare Trust (with trustee acting as an agent) have been exempted from the requirement to file the T3 returns until the year that ended on December 31, 2025, unless CRA specifically requests a return. True Trusts are not similarly exempt. The penalty for failing to file a T3 return on time is $25 a day (minimum $100, maximum penalty of $2,500). An additional penalty equal to the greater of $2,500 or 5% of the maximum value of the property held during the taxation year by the trust may apply where a failure to file was made knowingly or due to gross negligence.

Bill C-15 has further broadened the exemptions by removing certain categories from the requirement to file T3 return; some of which are:

• Spouses owing joint bank account for the use and benefit of both spouses.
• A parent coming on title, only to enable their child to qualify for the mortgage.
• Where matrimonial home is held in name of only one spouse.

The article provides general information which may or may not apply to you. Give us a call to get tailored advice for you.