Bare trusts are commonly used in the real estate industry. The land titles systems in most Canadian jurisdictions have an idiosyncrasy that drives real estate developers and other businesses in the real estate sector to use bare trusts. Specifically, land titles legislation and registration procedures do not recognize the existence of partnerships. However, limited partnerships are a popular form of a business organization in real estate, owing to tax efficiencies as well as other legal and commercial reasons. The Land Titles Act in Alberta, for example, does not permit partnerships to be registered on title. The solution is to use a bare trust, where a legal person – typically, the corporation that functions as the general partner – holds bare legal title on behalf of the partnership.

A bare trust, in essence, is a simple trust arrangement where the trustee holds legal title to the property on behalf of the beneficiary, who retains all the rights and obligations related to the asset. This means the beneficiary has complete control over the property, including the right to sell or develop it, while the property is registered in the name of the trustee.

The appeal of a bare trust lies in its simplicity and flexibility, however, the use of one must adhere to strict reporting requirements with the Canada Revenue Agency (CRA). Historically, bare trusts were not required to file T3 Income Tax Returns, but as part of increased scrutiny on trusts, possibly in an effort to increase transparency and combat tax evasion, businesses that use bare trusts must be aware of their reporting obligations to avoid potential penalties.

For taxation years beginning in 2023, bare trusts are required to file a T3 Trust Income Tax and Information Return, similar to any other type of trust. This is the case even though a bare trust is a disregarded entity, and as such, has no income and is not liable for tax. It is the beneficiary who is liable for tax, not the bare trust itself, which differs from other types of trusts. The return requires detailed information about the trust, the trustee, and the beneficiaries, including their identities and the nature of their involvement with the trust. Failure to comply with this filing requirement can result in significant penalties.

Takeaways

Real estate clients in Alberta should proactively manage their bare trust arrangements with a clear understanding of their reporting obligations. Unfortunately, these onerous reporting requirements are burdensome for the accounting profession as well, given the need for an increased volume of tax return preparation.

Field Law’s tax group can assist both businesses and accountants in handling the following types of issues:

• rendering a legal opinion on whether a bare trust exists, triggering reporting requirements,
• if necessary, preparation of a bare trust agreement, required to be filed with the CRA along with the return,
• strategic advice on whether the bare trust arrangement is necessary, efficient, or advantageous to continue in a particular situation given the new reporting requirements, and
• reorganizing the structure, if advisable to do so, such as replacing a limited partnership with a corporation in a tax-efficient manner.

It is essential to safeguard your investments and avoid potential penalties. If you are a real estate client in Alberta utilizing bare trusts, contact Rob Worthington or any member of Field Law’s Tax group to ensure compliance with the CRA's reporting requirements.