What is the Difference Between an Alter Ego Trust and a Bare Trust?

Alter Ego Trust

An Alter Ego Trust is a special type of inter vivos trust allowed under Canada's Income Tax Act. You must be a Canadian resident who is 65 years or older to settle it. The distinctive feature is that you can be the settlor, trustee, and beneficiary of the trust as long as you are living. The income and capital of the trust must only benefit you as the settlor during your lifetime. On the death of the settlor, the remaining trust property will be distributed to, or continue to be held for, family members, friends, or organizations as specified in the trust deed.

The joint partner trust is similar to an alter ego trust, except that the settlor and their spouse, together, must be entitled to receive all of the income of the trust that arises before the death of the survivor of them. You can transfer any kind of "capital property" to an alter ego trust, but you cannot transfer non-capital property such as inventory. You also cannot transfer RRSP or RRIF directly into these trusts.

Tax Treatment of Alter Ego Trust

Generally, a property transfer into a trust is considered a disposition and will trigger tax on any accrued gains. However, one of the benefits of transferring property to an alter ego trust is that the transfer will not attract tax on accrued gains as it will be deemed for tax purposes to have accrued on a tax-deferred rollover basis. The 21-year deemed disposition rule does not apply to alter ego trusts. The annual taxes must be filed for trusts. Any income retained in the trust and not paid to the settlor will be taxed at the highest marginal rate.

Advantages of Alter Ego Trust

Probate process does not apply to alter ego trusts.

Continuous management of property.

Privacy and confidentiality.

Protection from estate litigation.

Alternative to a power of attorney.

Asset protection.

Disadvantages of Alter Ego Trust

Cost and complexity.

Control and flexibility.

When to Consider an Alter Ego Trust

You own assets of significant value, and probate fees are high.

You don't need to access the trust capital during your lifetime, but you can pay the tax on the earned income.

You have assets in multiple jurisdictions.

You are in a second marriage and wish to provide for your spouse during their lifetime but leave the remaining assets to your own children after your spouse's death.

When an Alter Ego Trust is Less Attractive

Your assets you wish to transfer are of nominal value.

You live in a jurisdiction with no or minimal probate fees.

You want to retain control over your assets.

Bare Trust

A bare trust is a trust arrangement under which the trustee acts as an agent for all the beneficiaries. For example, when you add someone's name to an account or property ownership, or when a parent co-signs a mortgage for their child. The parent acts as the trustee, and the child is the beneficiary.

The deadline for filing a bare trust return is 90 days after the tax year-end. If the account has $50,000 or less, there is a filing exemption, and no trust return is required.

When to Consider a Bare Trust

The value of the real estate is such that probate tax savings are significant.

The individual is likely to own the property for the rest of their lifetime.

There won't be any issues with current mortgage arrangements or future financing.

Other probate exemptions, like Ontario's "first dealing exemption," are not available.

For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca