What Is a Bare Trust in Canada and How Does It Work?

You may have heard the term "bare trust" from a lawyer, an accountant, a bank or a news story about new CRA rules. It sounds technical, but the basic idea is simple: one person holds title to something, and someone else is really the owner.

This article explains what a bare trust is in plain words, who the people involved are, how it differs from a regular trust, and how it generally fits into Canadian federal tax. It does not replace advice on your own situation.

This article covers Canadian federal tax law, which applies in every province.

What a bare trust means in plain words

The Income Tax Act does not define "bare trust". CRA uses the term for an arrangement where the trustee acts as agent for all of the beneficiaries. Such an arrangement is generally treated as not being a trust for the purposes of the Act, with some exceptions.

Put simply, the name on title and the real owner are different people, and the person on title does what the real owner tells them to do. That is why people sometimes call the trustee a "nominee" or a name on title only.

Who the trustee and beneficiary are

A trustee generally qualifies as an agent, called a bare trustee, when the trustee has no significant powers, cannot act without the beneficiary's instructions, and only holds legal title. The beneficiary is the beneficial owner and the trustee is the legal owner.

• Trustee (bare trustee): the legal owner whose name is on title, acting as agent.
• Beneficiary: the beneficial owner, who gives the instructions.
• Settlor: the person who set up the trust by contributing property.

How a bare trust differs from a regular trust

The line between the two is not always obvious. CRA says whether a bare trust exists is a question of fact, and that it cannot give definitive determinations on whether a trust exists. It suggests consulting a legal advisor if you are unsure.

How the tax side generally works

For a reportable bare trust, all income, capital gains and capital losses from the trust property should be reported on the beneficial owner's tax return. The trustee does not report them on the trust's T3.

On the principal residence exemption, ownership includes being a beneficial owner of the property, alone or jointly with another person, so the beneficial owner behind a bare trust can look to the exemption. The exemption has other conditions that depend on the facts.

Under s. 150(1.3) of the Income Tax Act, for section 150 purposes an express trust includes an arrangement where a legal owner holds property for the use or benefit of others and can reasonably be considered their agent. That is how some bare trusts are pulled into the reporting rules. There are exceptions, including these:

• Every beneficiary is also a legal owner and no legal owner is a non-beneficiary, such as a joint bank account held by family members for each of them.
• The legal owners are related individuals and the property is real property that would be the principal residence of one or more of them, which CRA says covers a parent on title so a child can get a mortgage.
• An individual holds real property for a spouse or common-law partner and it would be the owner's principal residence.

There are further exceptions, for example for partnership property filed on a partnership return and property a court order requires someone to hold.

What to do next

If you think you hold property as a bare trustee, or someone holds property for you, a little organization now avoids problems later.

• Write down who is on title and who really owns and controls the property.
• Collect any written agreement, mortgage papers or instructions between the parties.
• Note whether the property is a home, a bank account, investments or something else.
• Check which of the exceptions above might apply to your family or arrangement.
• Ask a lawyer or accountant to confirm whether you have a bare trust and whether any filing is needed.

Frequently asked questions