What is a Bare Trust?
Bare trusts are a simple concept, and many of us have them in place without being aware of it. At their core, bare trusts are where one person’s name is shown as the owner of an asset, but the asset really belongs to someone else.
The person who is the true owner of the property is called the owner (that part is easy), and the person whose name shows up as an owner but who really doesn’t have any entitlement to the rights and risks of the property is called a bare trustee or nominee.
This short article will highlight some of the flags to make us more savvy users of bare trusts, and the vital takeaway is to be sure to paper your bare trusts.
Why Do I Care About Bare Trusts?
Bare trusts are subject to a wide range of laws, and operating without knowledge of these can, quite literally, cost you. The most common risks are in connection with bare trusts for real estate and their interaction with:
Capital Gains Exemption
The principal residence exemption is heavily relied on by Canadian homeowners. It relieves Canadian taxpayers from the obligation to pay capital gains tax when they sell or transfer their principal residence. The tax rate varies person-to-person, but it is often approximately a 25% tax.
If the exemption is not available, generally the increase in value from when the home is purchased until it is sold is subject to that tax. For example, if a home is bought for $500,000 and sold for $1.5M, the tax would be approximately $250,000. That is a big cheque most of us would prefer not to write.
There are two common circumstances where someone else’s name shows up on a home:
For the parent not to have to pay the tax and for the child to be able to claim the exemption, both will need to be able show that the parent is a bare trustee and the child is the owner. Without that proof, pull out the chequebook.
When the parent dies or wants to transfer the home, they are anticipating accessing the full capital gains exemption for the home. Without proof that the parent is the owner of the whole property, part of the exemption can be lost.
The solution in almost all instances is to have a bare trust agreement between the parties involved that clearly sets out the owner and the bare trustee. Without that bare trust agreement, the principal residence exemption could be denied, with a resulting bill for the taxes.
The Law and Equity Act (British Columbia) starts from the principle that if people want to be able to enforce their relationships with land, it must be in writing. If there is nothing in writing, then other evidence and conduct can be looked to. This principle makes it clear that if people are looking for certainty and clarity, putting the bare trust arrangement in writing is the best option.
If we continue with these same two common examples, consider what happens if the parent dies and there is no bare trust agreement.
a) the parent’s estate may have to pay probate fees on the value of their percentage of the property, and
b) the other beneficiaries of the parent’s estate could end up as the owner of that property interest. Imagine a sibling of the child now owning 1% of the child’s property….
The costs in this scenario are both economic (estate litigation can be settled quickly or can balloon to hundreds of thousands of dollars) and familial (relationships within the family are commonly permanently broken in the course of these disputes).
Land Owners Transparency Act (LOTA)
All bare trusts in respect of real estate in BC must be disclosed through a public registry created under LOTA, called the Land Owner Transparency Registry. For existing bare trusts, they must be reported by November 30, 2022. For all new bare trusts, they are to be reported when they are created.
The registry is publicly searchable in a limited way, and more broadly searchable by various government authorities, including the Canada Revenue Agency (CRA). In either of the common scenarios above, it is anticipated that:
Ensuring that there is both a bare trust agreement and corresponding registration in the Land Owner Transparency Registry is anticipated to be vital in the scenarios above where parents and children are registered together as owners of the property.
There are additional financial consequences for failing to record the bare trust in the registry, including penalties for individuals that are the greater of $25,000 and 15% of the assessed value of the property.
What to do…
Consider whether you have any assets, particularly real estate, where there is a bare trust. If so, ensure that there is a bare trust agreement in place that reflects your situation and that it has, in the case of real estate, been disclosed in the new Land Owner Transparency Registry.
This information is current to August 30, 2022 and is not a substitute for legal or tax advice and should not be relied on as legal or tax advice.