Everything you need to know about trusts, taxes, and bare trust reporting requirements.

There’s a lot to consider when inheriting valuable items from family, like a home. Some of these come with massive tax burdens, while others work differently. This blog will help you navigate the complicated world of trusts, and how to get the most out of them with the lowest administrative and tax burdens.

What is a trust?
A trust operates as a specialized vessel, safeguarding assets or wealth for the benefit of others. A trust involves 3 key players:

• The Settlor: This is the person who initiates the trust. They are the owner of the wealth or property and are giving it to the beneficiary.
• The Trustee: This person manages the trust’s assets. They make sure the assets meet the needs of the chosen beneficiary.
• The Beneficiary: This is the recipient of the trust.

What are the benefits of using a trust?

Asset protection: Trusts act as shields that can protect assets from unforeseen events or potential debts. When people put assets in a trust, they create a safety net. This ensures the right person gets their share. It protects their assets from outside factors, like legal liabilities or creditors who want to collect on debts.

Assets held within an irrevocable trust may be shielded from potential claims by creditors because they’re no longer considered the property of the individual who established the trust.

Tax efficiency: A family member can use a trust to pass down an estate. This can help lower estate taxes for the beneficiary. This would depend on how the trust is structured. It’s recommended to discuss this with a lawyer specialized in the field.

Probate avoidance: Probate is the legal process that validates a will and allows the executor to distribute assets after a person’s death. If assets are held in a trust, probate wouldn’t be necessary. This is helpful to beneficiaries as it helps them avoid probate fees and delays in accessing the asset. 

What are the disadvantages of using a trust?
Trusts are not all fun and games, and in the world of complex financial planning, trusts do have some drawbacks.

Trusts are complex and take lawyers, planning, and good administration to manage. Financial complexities deter some people, so they choose more straightforward financial arrangements.

Trusts can be costly. We’re sure you guessed it when we said lawyers and financial planners would be involved. The creation and administration of a trust comes with expenses for the settlor, the trustee, and the beneficiary. This might make a trust less suitable for the situation.

How do I create a trust?
For anyone thinking of creating a trust, here are some important things to consider:

1. Define the purpose: Clearly articulate the objectives of the trust. What’s it for and what’s it supposed to accomplish?
2. Select the key players: Who is the best trustee who can be responsible for the trust once the settlor sets it up? Who is/are the beneficiar(ies)? If the key players can’t work in harmony, this might cause more trouble down the road.
3. Draft the trust deed: The trust deed is the document that outlines the rules of the trust, the responsibilities of each person involved, and how the assets will be distributed when the time comes.
4. Fund the trust: It all becomes real when the financial asset is transferred into the trust.

What is a bare trust?
A bare trust is an arrangement where the trustee acts on behalf of the beneficiary but doesn't have much power or responsibility. The trustee can't do anything without the beneficiary's instructions and mainly just holds the legal title to the asset, usually property. This often happens when an adult child is added to the legal title of their parent's home for estate planning.

Your trust might not be called a bare trust on its deed or documents. It might be called a “nominee agreement” or an “agency agreement,” or might not even have a legal document but still meets the requirements.

This year and moving forward, the Canadian government established new reporting guidelines for bare trusts.

What are the new guidelines on bare trust reporting requirements?

For the 2023 tax year bare trusts required a T3 return (Income Tax and Information Return). The CRA has confirmed they won’t require bare trusts to file a T3 for the 2024 tax year, unless they make a direct request for these filings.

This only applies to bare trusts. Other types of trusts will still have to file a Schedule 15 with their 2024 T3 return. There are also exceptions to this requirement, so working with your Tax Expert is your best bet to ensure you’re filing what is required.

It’s been announced that bare trusts will resume filing for the 2025 taxation year, though the types requiring it will be reduced compared to the 2023 year. They’ll be exempted when:

• The trust property consists of real property that is the principal residence of one or more of the legal owners and all the legal owners are related to each other.
• All the trustees and beneficiaries are related, and the trust property consists only of prescribed investments such as cash, GICs, mutual funds, personal use property, and publicly traded securities not exceeding $250,000. 
   

This includes where a parent is added to the title of their child’s home for financing purposes, or a child gets added to a parent’s bank account to help them manage their finances. These are the two most common situations we see at H&R Block.

If you need help understanding your tax filing requirements when it comes to trusts, an H&R Block T3 Tax Expert can help! Find an office near you to book an appointment today.