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A bare trust, also known as a nominee agreement, is a Trust where an appointed person (the “trustee”) holds property for one or more beneficiaries. The legal title of the property is held by the trustee while the beneficial interest is owned by the beneficiaries.
Bare trusts used for administration of property after death:
Another purpose is to transfer property after death for estate planning. In this situation, the owner of the property transfers the property to the joint names of themselves and another person(s), as trustees. On the death of the original owner, the trustees then become the holders of the property for the benefit of the owner’s estate. If the trustees are also the executors of the estate, then they hold the property as trustees and as executors of the estate. Depending on which province you live in and the total value of the estate, the property may or may not need to be probate.
Bare trusts used for net policy proceeds:
A bare trust may be used to transfer net proceeds of insurance proceeds, RRSP, or RRIF, to a named beneficiary who is to act as a trustee. The named beneficiary is then instructed to hold the proceeds for the true beneficial owner. This is often done for young children. The parent will name an adult who will receive the policy proceeds and will hold it for the child until they are of a certain age. This will avoid the policy proceeds from entering the estate of a deceased and therefore, avoids probate and administration tax.
A bare trust may be used by parents and adult children to purchase property. For instance, a parent may need to be added to the title of a child’s home for the mere purpose of securing a mortgage. In these cases, the title of the property is often held with 99% interest to the child and 1% interest to the parent. The 1% interest is considered a bare trust. Although the parent holds it, the true owner is the child. Therefore, the parent is considered the trustee of the 1% and the child is the beneficial owner.
Bare trusts and Trustees duties:
In additional to the normal legal duties of safeguarding the trust property, the trustee in a bare trust does not have any other duties to perform beyond conveying the property to the beneficiaries. Because the trustee only acts as an agent or nominee for the beneficiary, they remain tax neutral provided that they are a Canadian resident.
Problems with bare trust:
The biggest problem with bare trusts is that they are rarely documented. Often property is transferred to a trustee without the transferor’s intentions being put on paper/deed. In these instances, various parties will bring challenges in court seeking ownership of the property. This is especially true where the trustee is also the beneficiary by way of the right of survivorship. For instance, a parent adds a child to the title of a property or adds them as a joint holder of an account with the intention for the child to obtain the who of the property after the parent’s death. However, without a written bare trust document to evidence this intent, the other children or beneficiaries can challenge the transfer.
The second problem with bare trusts, when they are put in writing, is that the proper language and provisions are not included. Some common errors are 1) failure to include provisions for replacement of trustees and 2) failure to detail transfer to minor children, such as the age of transfer.
Tax consequences of bare trusts:
There are no immediate tax consequences when the bare trust is created as long as there is no change in the beneficial owner. Taxes are payable once the beneficial owner changes.
Remember section 248(1) of the Income Tax Act: there is no disposition for tax purposes where
…any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property…
For instance, proceeds of a life insurance are not taxable when transferred directly to the named beneficiary on the policy. Therefore, the beneficiary on the policy may hold the proceeds on a trustee without taxes consequences.
However, assets such as RRSP and RRIF are taxable, are taxable - even in a bare trust. On the passing of the owner of the policies, the proceeds of the RRSP and RRIF will go to the trustee to hold. The tax liability of the RRSP and RRIF will be paid by the estate of the deceased. If there are insufficient funds in the estate, the taxes will be paid from the RRSP and RRIF proceeds being held in the bare trust.
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