Bare Trusts and Property Transfer Tax Exemptions:
Is the Door Closing?
In its most simple form, a trust is created when one or more parties, called a trustee, holds the legal interest in property for the benefit of one more other parties, called the beneficiary. Trusts can be used in a wide variety of situations, from making arrangements for the care of minor children in the event of their parents’ death, to holding the assets of high net worth families, to minimizing the tax treatment of income in corporate activities.
Recent comments by BC’s government, and changes to disclosure requirements when transferring title to real estate, have called into question whether one particular type of trust, the bare trust, will continue to be a useful tool for BC real estate transactions.
No matter the underlying purpose of a trust, and no matter the value and scope of assets held by the trustees for the beneficiaries, all trusts share three essential characteristics:
- there must be an initial transfer of property into the trust, by a settlor, with a clear intention that the trustees hold the property for the benefit of the beneficiaries;
- any property transferred into, or acquired by, the trust must be clearly defined; and
- the trustees and the beneficiaries must be capable of being clearly identifiable.
While a trust can be created by oral agreement, or even the actions of the parties, from a practical perspective, the terms of a trust are almost always captured in writing.
One particular type of trust arrangement is called a bare trust. Unlike most trusts, where the trustees are, subject to the terms of the trust, the final authority in determining how the trust property is managed and/or distributed to the beneficiaries, trustees in a bare trust take no part in the active management of the trust property, instead relying on instructions from the beneficiaries of the bare trust.
Bare Trusts: Uses
By far the most frequent use of bare trusts is to hold legal title of real estate, whether residential or commercial, in trust for a beneficiary. As with other trusts, the legal and beneficial interest in the real estate is separated between the trustee and beneficiary. However, in the case of a bare trust, the trustee is a mere agent of the beneficiary, required to act on that party’s instructions. As such, for income tax purposes, the trust is ignored and the beneficial owner is deemed to be the actual owner of the real estate.
One benefit of this arrangement in BC permits legal ownership of real estate to change hands without attracting capital gains taxes so long as the beneficial owner remains the same, as the transfer of the real estate is not a ‘disposition’ for income tax purposes. Another widely employed use of bare trusts has been to avoid payment of Property Transfer Tax (PTT). Because BC’s PTT structure only attracts PTT where there is a transfer of legal title to a new owner, parties are able to completely avoid the payment of PTT by employing bare trust agreements to separate the legal and beneficial ownership of property. So long as only the beneficial interest in the property held by the bare trust is transferred, no PTT is payable. The ability to transfer the beneficial interest in real estate, and avoid PTT, has been a powerful estate and tax planning tool in BC.
The End of the Bare Trust?
While the PTT exemption continues to apply to bare trusts, the future usefulness and benefits of these trusts in BC real estate transactions have recently been called into question. Specifically, on September 17, 2018, a new PTT form was introduced requiring that additional information now be disclosed where a real estate transaction takes place through a trust, including a bare trust. Now, in addition to disclosing the legal owner of the property, parties must also disclose certain information about any other party with an interest in the real estate, including a party with a beneficial interest. These new disclosure requirements apply to both residential and commercial real estate transactions.
While it is still unclear exactly what will happen with the additional information collected, the Provincial government has been clear in its intent to close ‘loopholes’ in the current PTT regime. At present, such additional information has only been collected for the stated purpose of creating a registry in order to, in part, determine the nature and scope of bare trusts and beneficial ownership in the real estate market. With Carol James, the NDP’s Finance Minister, repeatedly on the record as saying that ending hidden ownership in real estate is a fight against tax evasion, tax fraud and money laundering, it is not difficult to conclude that the past practices and benefits respecting bare trusts, so far as they involve real estate, may soon be coming to an end. What new PTT regime will be used to replace current practices, and what new tax planning strategies may be employed to continue to achieve buyers’ and sellers’ desired outcomes, will undoubtedly be of great interest to BC real estate owners.
For more information on this subject, and all your estate planning or real estate needs, please contact SHK and one of our experienced lawyers will be pleased to speak with you.