Over the past decade, the use of bare trusts to reduce probate tax has become increasingly popular. However, with the Canada Revenue Agency’s (CRA) new reporting requirements, they may be less suitable in certain circumstances. In this blog post, we’ll delve into the key details surrounding bare trusts and the implications of the new reporting requirements.
Understanding Bare Trusts and Their Purpose
Bare trusts are a legal arrangement in which one party (the trustee) holds legal title to assets, but the beneficiary has the right to all income and capital associated with the assets. This structure is commonly used in estate planning to separate legal ownership from beneficial ownership, allowing individuals to maintain control and flexibility over their assets while minimizing probate tax.
When to Use Bare Trusts and Who They Are For
Bare trusts are typically used in scenarios where individuals want to avoid probate tax while retaining control and ownership of their assets. They are particularly suitable for individuals who:
– Own valuable real estate or assets subject to probate tax.
– Intend to retain ownership of the property for the long term.
– Wish to avoid negative income tax implications associated with corporate ownership of assets, such as the principal residence exemption.
New Trust Reporting Requirements for Bare Trusts and Other Trusts
The CRA has introduced new reporting requirements for trusts to enhance transparency and tax compliance. These requirements apply to all trusts, including bare trusts, and require detailed information regarding settlors, trustees, and beneficiaries to be disclosed.
Key Changes Impacting Taxpayers
Two major changes affect taxpayers:
1. **Detailed Disclosure Requirements:** Most trusts must disclose detailed information even if no income tax is payable.
2. **Inclusion of Bare Trusts in Reporting:** Bare trusts are now explicitly included in the reporting requirements.
Impact on Trust Filings
The new regulations necessitate trusts to file tax returns within 90 days of the year-end. This change has resulted in increased compliance costs, with trust return preparation now ranging between $1,000 to $1,500. Moreover, lawyers holding separate trust accounts for specific clients must also file trust returns.
Guidance for Legal Professionals and Trust Holders
Legal professionals advising clients on bare trust arrangements must now consider the implications and potential costs of the new reporting requirements. Trust holders should be aware of the increased compliance obligations and potential penalties for non-compliance.
Bare trusts have long been a valuable tool in estate planning, providing individuals with flexibility and control over their assets. However, the introduction of new trust reporting requirements by the CRA signifies a significant shift toward increased transparency and tax compliance. It’s essential for individuals and legal professionals alike to understand these changes and their implications to make informed decisions regarding trust arrangements. For further guidance and assistance, reach out to Haghani Law today.
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