A popular way to reduce probate tax, CRA's changes makes them less suitable in certain circumstances
This article was provided by eState Planner.
Over the past decade, the use of bare trusts to reduce probate tax has become increasingly popular. However, with CRA’s new reporting requirements, they may be less suitable in certain circumstances.
When to use bare trusts and who they are for
Bare trusts, like common trusts, separate “legal” ownership from “beneficial” ownership. The key difference is that a bare trustee must only follow the beneficial owner's instructions and has no independent discretion or other powers. Thus, the trustee’s authority is “bare”.
Where land is owned by an individual, their death typically results in the requirement for probate. Where a corporation is on the title, it can convey legal title without probate. However, a corporation owning the beneficial interest in a principal residence has negative income tax implications for the individual. A bare trust, splitting legal title (corporation) and beneficial title (individual), can resolve this by maintaining the Individual’s principal residence exemption and control, while still avoiding probate.
When should you consider a bare trustee?
- The value of the real estate is such that the probate tax saving is significant.
- The individual will likely own the property for the rest of their lifetime.
- There won't be any issues with the current mortgage arrangements or future financing.
- Other probate exemptions like Ontario's "first dealing exemption" aren't available.
For more details on bare trust planning, visit eState Planner’s webinar library for a webinar recording on bare trusts.
But as of this year, there is another crucial factor to be considered - the new trust reporting requirements.
New trust reporting requirements for bare trusts and other trusts
The CRA revealed crucial regulatory improvements for trusts to enhance transparency and tax compliance.
Jordan Atin and Ali Spinner discussed these new trust reporting requirements at a recent eState Planner webinar. The main points are below, and the full video can be found here.
Key changes
Two major changes affect taxpayers: Most trusts must disclose detailed information regarding settlors, trustees, and beneficiaries even if no income tax is payable, and bare trusts are now included in reporting.
Trust filings impact
New regulations necessitate trusts to file tax returns within 90 days of the year-end.
Challenges and consideration
With these changes come increased compliance costs, with trust return preparation now ranging between $1,000 to $1,500.
Lawyers who hold separate trust accounts for specific clients must also file trust returns.
Guidance for lawyers
When discussing Bare Trust planning with new clients, the implications and potential costs of the new reporting requirements should be part of the discussion.
One of the best and free resources is the eState Planner’s webinars. These CPD-accredited webinars, available live weekly and on-demand, provide lawyers with insights to keep their practice up-to-date.
eState Planner provides many resources such as guides and exclusive reports to help lawyers practice more safely. Their software, used by thousands of estate professionals in Canada and two-time winner of the Canadian Lawyer's Readers Choice Award, streamlines client intake. It also creates error-free estate plans and generates wills and other legal documents for lawyers. Visit e-stateplanner.com to book a demo or start a free trial.
