Bare Trusts Explained
A bare trust is a legal structure that facilitates the separation of legal and beneficial ownership over a property.
Generally, it’s used in a real estate context. A bare trustee company is created which is a BC corporation that holds the legally registered title on the property.
The beneficial ownership remains with the person who originally purchased the property. The beneficial owner is the person or persons who continue to make all arrangements; they’re responsible for leasing the property, receiving rents and reporting income.
The beneficial owner is the real owner of the property.
The bare trustee company is the one that is actually on the title, the company name is registered in the land title office (the “LTO”).
From a tax perspective, the trustee company isn’t going to be reporting any taxes at all because they don’t actually beneficial ownership of the property. When it comes time to reporting annual income from rents or anything else associated with the property, the trustee company will have nothing to report and similarly when it comes time to sell the property they don’t have any gain to report; it’s the beneficial owner who’s going to be reporting income tax and is going to be responsible for reporting any kind of capital gain from the sale of the property.
What are the benefits?
The primary benefit of a bare trustee company is that you can avoid paying the property transfer tax (PTT) when it comes time to sell the property. At the time of sale, the property as well as the bare trustee company will be sold to the new owner. The shares in the bare trustee company will be sold for a dollar to the purchaser.
At that point in time because there’s no change of ownership in the land title office there’s no requirement to pay the property transfer tax so this can be of great benefit to both the vendor and the purchaser. It can result in a higher sale price for the vendor and it’s something that’s more attractive to purchasers.
Another benefit of using a bare trust is that it also allows for greater flexibility in who can be an owner of the property. Instead of having to register a new person on title every time they are added as an owner of the property you can simply change who is an owner of the shares in the bare trustee company so such a change becomes easier.
Finally, the last benefit is that it provides a certain degree of anonymity; because the bare trustee company is the registered owner of the property and are generally going to be a numbered company, the actual beneficial owner of the property will be obscured from the public eye.
However, this will change within the near future within the next 12 to 18 months.
It’s expected that the BC government is going to come up with a transparency register for discerning who is the actual beneficial owner of the property in BC.
What are the disadvantages?
The disadvantages of setting up a bare trustee company are the costs. The costs of establishing a bare trust are that you need to establish a BC Corporation and you’re also going to need to create a bare trust agreement. Costs are going to be around $1250 to $1500 dollars for that and then you will have the annual costs of maintaining the company of approximately $400.
If you have any other questions about bare trusts, just feel free to drop a comment or book a consultation.
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