Introduction to Trusts
A trust is a legal arrangement where a person, known as the settlor, transfers assets to a trustee who holds and manages these assets for the benefit of one or more beneficiaries. The trustee is responsible for making decisions regarding the trust and must follow any specific instructions about how the assets should be managed and when they can be used or distributed to the beneficiaries.
Types of Trusts
There are several types of trusts, but the most common ones for individuals are testamentary trusts and inter vivos trusts.
- A testamentary trust is created after a person’s death, often to manage assets left to minor or disabled beneficiaries.
- An inter vivos trust, also known as a living trust, is established during a person’s lifetime. It can be! used for various purposes, such as owning shares in a small business, holding funds for a spouse or child, or as part of income division strategies.
Understanding Mere Trusts
A mere trust, or bare trust, is a type of trust that may not seem like a traditional trust at first glance. Unlike most trusts, which are created using legal documents like a will or trust deed, a mere trust can arise based solely on the circumstances of a situation. According to the Canada Revenue Agency, a bare trust occurs when there is a separation of legal and beneficial ownership of a property. This means that even though the trust property is registered under the name of the trustee, the beneficial owner has the rights or characteristics of ownership, including possession, use, risk, and control.
Examples of Mere Trusts
Examples of mere trusts include:
- An investment account opened by a parent for their child, where only the parent’s name appears on the account.
- A parent co-signing on their child’s mortgage and being listed as a 1% owner on the title, even if the child is considered the 100% owner of the home.
- A parent adding their child’s name to the title of their home as a co-owner to avoid probate, even though the parent is still considered the 100% owner of the property.
Filing a T3 Trust Declaration
Most trusts are required to file an annual tax return called a T3 Trust Income Tax and Information Return. This return must be filed within 90 days of the end of the trust’s tax year, which is typically December 31. Therefore, the deadline for filing is usually March 31 of the following year. The trust’s income may be taxed in the trust or allocated to the beneficiaries. When income is allocated to beneficiaries, it must be paid to them, used on their behalf, or documented as being owed to them in the future.
Tax Filing Requirements for Trusts and Bare Trusts
For the 2025 tax year, the deadline for filing T3 returns is March 31, 2026. There is ongoing uncertainty regarding the filing requirements for bare trusts. While some bare trusts may be exempt from filing requirements, others may need to file a tax return. Exceptions may apply under certain circumstances, but these exceptions have not been formalized into law, creating planning difficulties for taxpayers and tax professionals alike.
Conclusion
In conclusion, trusts are legal arrangements that allow for the management of assets for the benefit of beneficiaries. Understanding the different types of trusts, including testamentary and inter vivos trusts, as well as mere trusts, is crucial for effective estate planning and tax management. The filing requirements for trusts and bare trusts can be complex, and it is essential to stay informed about any changes to tax laws and regulations to ensure compliance and avoid any potential penalties. As the rules regarding bare trusts continue to evolve, seeking professional advice can help individuals navigate these complexities and make informed decisions about their financial and estate planning strategies.