Transferring Cryptocurrency To A Bare Trust Or Holding Cryptocurrency As A Bare Trustee
Published: August 17, 2022
Introduction to Canadian Cryptocurrency users and Bare Trusts
Smart contracts, cryptocurrency liquidity mining and crop farming, non-fungible tokens (NFTs), and other features are all becoming more and more common as blockchain technology develops. For Canadian cryptocurrency traders and blockchain investors, a straightforward trust agreement might add even another degree of freedom.
This post is for tech-sophisticated Canadians interested in cryptocurrencies who could benefit from creating a simple trust over their blockchain-based assets and who want to grasp the basic idea behind a simple trust. In this article, trust relationships are discussed in regards to their nature, their applicability to Canadian taxation, and the evidence that they exist. Finally, this post provides Canadian cryptocurrency users who have created or want to create a simple trust with tax guidance from our top Canadian crypto tax lawyers who specialize in cryptocurrencies.
What Do a Trust and a Bare Trust Mean?
The law of equity, a body of regulations created by the Court of Chancery in England and adopted by Canadian courts, is where the idea of trust first emerged. Legal and beneficial ownership are separated by equity. Although the beneficial owner is "the genuine owner of the property, even if it is in someone else's name," the legal owner is the person whose name appears on the title. (Csak v. Aumon, 1990, 69 DLR (4th) 567, Ontario High Court, p. 570.)
Consequently, a trust is a legal arrangement between a trustee, a beneficiary, and a piece of property. Additionally, it hinges on the distinction between actual and legal ownership: the beneficiary is, predictably, the real owner of the item, while the trustee is its legal owner.
The trustee is frequently tasked with looking after or administering the trust's assets for the benefit of the beneficiary by the trust's founder, also known as the settlor. For instance, a founder may ask a trustee to look after a sizable quantity of cash, digital currency, or non-fungible tokens for a beneficiary who is a youngster or has a disability.
A bare trust, on the other hand, is one in which the trustee's only responsibility is to manage the trust's assets in line with the beneficiary's instructions. In a simple trust, the beneficiary, therefore, maintains complete control over the trustee's interactions with the trust's assets.
As a result, a bare trust is essentially an agency arrangement where the bare trustee owns ownership of the property in their capacity as the beneficiary's agent. When the parties concur that one person (the agent) must follow another's instructions, an agency relationship is established (the principal). As a result, a simple trust is created when the parties concur that a simple trustee must follow the beneficiary's instructions with regard to property (the trust property). Fiduciary property is obviously that which the recipient actually owns but which legally belongs to the trustee.
In Canada, how is a trust taxed?
Despite the fact that a trust is a connection between entities rather than an actual entity, according to the Canada Income Tax Act, a trust is considered a distinct taxpayer. A trust is treated as a natural person for income tax purposes under paragraph 104(2) of the Income Tax Act (Canada). This implies that each tax year, the trust is required to submit a T3 tax return. This also implies that the trust settlement constitutes a disposition of the trust's property in the trust's favour, potentially subjecting the settlor to capital gains tax.
Additionally, if the trust earns revenue on its own, it is responsible for paying Canadian income tax at the highest marginal tax rate on any income that is kept inside the trust. The income that the trust distributes to the beneficiary may be written off. As a result, the recipients must pay taxes on the trust money they receive.
A trust that meets the requirements for Graduated Rate Estate (GRE) does not pay taxes on its revenue at the top rate; instead, GRE income is taxed at various rates. In essence, "graduated rate inheritance" refers to the estate of a deceased individual within 36 months after that person's passing away.
Every 21 years, the trust must likewise realize all accrued capital gains for tax purposes. A trust is deemed to dispose of all capital property at fair market value every 21 years under section 104 (4) of the Income Tax Act (Canada). This conditional rule does not apply throughout the beneficiary's life for spousal, alter ego, and joint partner trusts. Instead, the conditional disposition happens after the beneficiary's passing and then, if the trust is still in effect, every 21 years after that.)
What Taxes Apply to a Bare Trust in Canada?
A bare trust is not taken into consideration under Canadian income tax rules. Despite the fact that a trust is treated as a natural person for income tax purposes under subsection 104(2) of the Income Tax Act (Canada), this recognition rule does not apply to "an arrangement whereby a trust can reasonably be treated as an agent for all the beneficiaries of the trust in respect to all dealings with everything trust property" (see subsection 104(1)). Therefore, the transaction is not a disposition for income tax purposes if a person retains beneficial ownership of cryptocurrencies, non-fungible tokens, or other block chain assets when transferring title to a trustee, for example by transferring assets to a trustee with an open wallet, and the settlor is not subject to capital gains tax as a result.
A bare trust is not considered to be a trust for taxation purposes under subsection 104(1). Because of this, a bare trust is exempt from submitting a T3 trust tax return. A bare trust is also exempt from the paragraph 104(4) of the Income Tax Act's 21-year debt recognition criterion (Canada). So, for income tax reasons, a bare trust is not obliged to realize all accrued capital gains every 21 years.
Additionally, the transaction is taxed as if the beneficiary were dealing directly with the third party if the bare trustee, acting on the beneficiary's instructions, sells all or a portion of these block chain assets to that party. To put it another way, the recipient is required to declare the profit or loss as income. (As a result, depending on the details surrounding the transaction, the profit or loss will be displayed in the capital account or the income account.)
The same holds true for the overseas reporting requirement, which mandates that anybody who resides in Canada and possesses "designated foreign property" with a total worth of more than $100,000 file Form T1135. Because they reside on decentralized digital platforms and are classified as "intangible assets," cryptocurrency, NFTs, and other blockchain-based assets are "located, deposited, or held outside of Canada." They often meet the criterion of "certain foreign ownership" as a result. Even while the beneficiary of the bare trustee is the rightful owner of the digital assets through the simple trustee wallet, they actually belong to them. The beneficiary must submit Form T1135 declaring these assets if the total value of their cryptocurrencies, non-fungible tokens, and other blockchain assets reaches $100,000.
A trust's GST status often corresponds to how it is taxed. That instance, while interpreting the Canadian Excise Act's terms, courts often do not take a bare trust into account. This applies to Canadians who produce, market, and exchange non-fungible tokens. Since commercial sales of NFTs are regarded as taxable supplies under the Excise Tax Law, commercial sales of non-fungible tokens may result in GST/HST liabilities. As a result, you could be obliged to register for GST/HST and collect, collect, and transfer GST/HST from your NFT sales in Canada if you trade NFTs through a simple trust of which you are the beneficiary.
The Canadian trust tax laws include certain exceptions. For instance, while determining discounts for new GST/HST dwellings, a bare trustee is not disregarded (see The Queen v Cheema, 2018 FCA 45). Thus, even though Canadian crypto tax law typically disregards bare trusts, this policy is not applied everywhere. The takeaway is that you must first ensure that the bare trust will genuinely have the intended tax effects in your specific scenario before you proceed to enter into a trust relationship. Contact one of our knowledgeable Canadian tax lawyers in Toronto right now for guidance on taxation relating to Cryptocurrency and bare trusts.
How Can You Tell if a Bare Trust Has Been Established?
A bare trust must display the "three certainties" much like a traditional express trust does: (1) certainty of intent, (2) certainty of subject, and (3) certainty of object. In order to satisfy the certainty criterion, which pertains to the settlor's purpose to establish a trust, the settlor must obligate the trustee to hold the property for the benefit of the beneficiary. The certainty criterion calls for three things and applies to the assets the settlor desires to hold in trust. The property must first be owned by the creator, at least insofar as the founder wishes to transfer ownership to fiduciary management. Second, the trust's assets need to be established at the same moment the trust is created. Third, each beneficiary's rights to the assets of the trust must be clearly established. The trust beneficiary or beneficiaries are also concerned with the need of certainty of object. If the trust is a fixed trust, it must be able to identify each beneficiary or to ascertain a person's beneficiary status (if the trust is a discretionary trust).
However, agency law concepts also apply to interactions based on straightforward trust. The connection between a principle and an agent in which the agent has legal title to the property that the principal owns is, in fact, the foundation of a simple trust. As a result, the criteria for determining whether the parties have established an agency relationship also apply to the question of whether the parties have just established a trust.
There are two ways that an agency relationship might start: first, it could originate from a contract between the principal and the agent. Their consent may be expressed or implied by the behaviour or circumstances of the parties. Second, agency ties may develop in the past as a result of the principle later approving actions taken in its name.
In order for there to be an agency connection, both the principal and the agent must consent, the principal must provide the agent the authority to affect the principal's legal standing, and the principal must retain control over the agent's activities. An agency contract need not be put in writing by the parties. If there is no explicit agency agreement, whether an agency connection was intended by the parties is determined by their actions.
The degree of influence the intended principal has over the purported agent is the defining attribute. In particular, the principal retains effective ownership of any property that is the subject of the connection in an agency relationship. Therefore, a bare trust may develop when an agency relationship requires an agent to purchase the assets of the principal. If the agent purchases the principal's assets with the sole responsibility to carry out the principal's instructions, the agent holds the property as a bare trustee, while the grantor benefits from the rights connected with beneficial possession, such as the rights to use, own, dispose of, collect income from, and destroy property. On the other hand, if the suggested agent has sufficient autonomous power, authority, and responsibility over the property or does not have to follow the principal's orders in real estate transactions, he is neither an agent nor merely a curator.
In cases when the parties haven't put their agreement in writing, a variety of considerations can help determine if a simple trust has been established over the property. Among other things, the following questions will be pertinent:
Does the potential bare trustee engage in the trust without the intended beneficiary's knowledge or consent?
Are there any personal benefits that the proposed bare trustee receives from the proposed trust assets?
The parties' agreements must be carefully examined in light of the rules regulating agency and trust relationships in order to fully understand this term. Therefore, get in touch with one of our knowledgeable Canadian tax attorneys if you wish to establish a trust in regard to your bitcoin, non-fungible tokens, or other blockchain assets or if you want to confirm if you control these assets as a bare trustee.
Pro Tax Advice: A Written Bare-Trust Agreement is Essential and Tax-Planning Strategies Using Cryptocurrency and Bare Trusts
A bare trust enables you to preserve tax treatment that accurately represents your real ownership of these digital assets while holding cryptocurrencies, non-fungible tokens, or other digital assets in a wallet or exchange account in the name of another person or business.
For Canadian taxpayers wishing to launch a bitcoin trading firm, this frequently proves advantageous. A Canadian cryptocurrency trader can obtain the small business tax rate (SBD) and take advantage of tax deferral options by conducting their business through a Canadian-controlled private corporation (CCPC). A company may transfer cryptocurrencies, non-fungible tokens, or other blockchain assets at cost on a tax-deferred basis in accordance with Section 85 of the Income Tax Act, postponing correspondingly personal tax on accrued and unrealized gains. However, the proprietor of a cryptocurrency trading firm might opt to keep ownership of cryptocurrency wallets and exchange accounts separate from the business for convenience after incorporation. This may be done by entering into a trust agreement that stipulates the owner will keep possession of the assets as long as it serves the interests of the crypto trading firm only. A business will be regarded for tax reasons as directly trading with cryptocurrency assets in a wallet or exchange account. (To learn more about how to register a cryptocurrency trading business, visit our post on the Canadian tax advantages of running your cryptocurrency trading or NFT sales firm as an SPCC.)
Another typical situation is when a Canadian taxpayer wants to invest in cryptocurrencies, non-fungible tokens, or other digital assets and asks a friend or family member who has more knowledge to buy something on their behalf. Then, using taxpayer funds, a friend or family will buy the digital assets and keep them as a bare trustee for the taxpayer. Although the trustee is the legal owner of the digital assets in a trust relationship, the taxpayer who really owns the digital assets that form the basis of the simple trust is the only one who is responsible for any associated tax obligations.
As was already noted, there is technically no need for a formal agreement when establishing a bare trust. where the parties meant to establish a bare trust can be inferred from their actions. However, a written trust agreement must be signed if the parties want to create a trust. Similar to this, parties who have already signed an oral trust agreement must enter into a written trust agreement to document their previous trust relationship. The Canada Revenue Agency will almost certainly contest the existence of a bare trust in the absence of documented proof, notwithstanding the fact that a trust deed is distinct from the document that establishes the deed.
Consult with one of our experienced Canadian trust lawyers right away if you're thinking about creating a digital asset trust arrangement or if you want to know if a cryptocurrency-related contract counts as a bare trust. NFT and cryptocurrency taxes. Our skilled Canadian tax attorneys can create a bare trust agreement with the terms you want for your blockchain-related agreement in addition to offering tax advice on cryptocurrency planning options regarding bare trusts.
Q: What exactly is bare trust? And what does that mean in terms of taxes?
A: A bare trust is one in which the trustee's only responsibility is to dispose of the trust's assets per the beneficiary's instructions. In a bare trust, the beneficiary, therefore, maintains complete control over the trustee's interactions with the trust's assets. As a result, a bare trust is largely an agency arrangement where the beneficiary's agent, the bare trustee, owns title to the property. A bare trust is often disregarded by Canadian tax law. The transaction is not a provision for income tax purposes, and the settlor does not pay capital gains tax as a result, if a person retains beneficial ownership of cryptocurrencies, non-fungible tokens, or other block chain assets when transferring title to a bare trustee, for example, by transferring assets into the wallet of "a bare trustee." Similar to this, a simple trust's income is taxed as though the recipient had earned it personally. A simple trust is also exempt from filing a T3 tax return.
Q: To my friend, I sent a variety of cryptocurrencies and non-fungible tokens. How can I tell whether the trust I made is a bare trust? What happens if this transfer is not a bare trust?
A: When you transferred bitcoins and NFTs to your buddy without using a bare trust, you effectively sold those digital assets at fair market value, which will expose you to capital gains tax if the Cryptocurrency has gone up in value since you purchased it.
A bare trust must exhibit all three of the so-called certainties, just like a traditional express trust does:
You must have wanted to generate bare trust, therefore meeting the certainty of intent.
Certainty of subject: Ownership of the bare trust must be established at the moment the trust is founded, and your beneficial ownership of the ownership of the trust must be sufficiently assured. You must also own the cryptocurrencies and non-fungible tokens you have transferred to the trust.
Certainty of object: You must be able to prove that you were the intended recipient.
However, agency law concepts also apply to interactions based on bare trust. The connection between a principle and an agent in which the agent has legal title to the property that the principal owns is, in fact, the foundation of a bare trust. As a result, the criteria for determining whether the parties have established an agency relationship also apply to the question of whether the parties have just established a trust. In order for there to be an agency connection, both the principal and the agent must consent, the principal must provide the agent the authority to affect the principal's legal standing, and the principal must retain control over the agent's activities. If there is no explicit agency agreement, whether an agency connection was intended by the parties is determined by their actions.
Q: Do I need a formal trust arrangement in writing?
A: The answer is no, a formal agreement is not necessary to create a basic trust. Whether the parties meant to establish a bare trust can be inferred from their actions. However, a written trust agreement must be signed if the parties want to create a conventional trust. Similar to this, parties who have already entered into an oral trust agreement must enter into a written trust agreement to maintain their previous trust relationship. The Canada Revenue Service is likely to contest the existence of a bare trust in the absence of documented proof, notwithstanding the fact that a trust deed is distinct from the document that establishes the deed. Our knowledgeable Canadian tax attorneys can write a trust agreement with the clauses necessary for your specific circumstances.
Q: I am the beneficiary of a basic trust that holds non-fungible tokens and cryptocurrencies. Should I submit Form T1135?
A: A bare trustee is disregarded for income tax reasons, and the beneficiary of a bare trust is taxed in the same way as an individual who owns property directly. For any tax year in which all three of the following circumstances hold true, you are often required to submit Form T1135: (1) You were a resident of Canada for tax purposes; (2) You owned "specific foreign property" throughout the year; and (3) At any point during the year, the total tax value of the "specified foreign property" you held exceeded $100,000 (in Canadian dollars). Due to the fact that they exist on decentralized digital platforms, cryptocurrency, NFTs, and other block chain-based assets are "located, deposited, or held outside of Canada." They often fall under the category of "particular foreign property" as a result. Therefore, even if your cryptocurrencies and non-fungible tokens are technically owned by a simple fiduciary through a simple fiduciary wallet, you might need to submit Form T1135 to declare these block chain assets if their combined worth is greater than $100,000. However, "property that is utilized or held purely in the course of an operating business" is not included in the definition of "specified foreign property". This contains inventory. Therefore, if you run a business trading cryptocurrencies and NFTs, the cryptocurrencies and NFTs you have on hand are not regarded as "certain foreign property." This can be a reference to digital assets and NFTs that you hold in trust. So, check with an experienced Canadian tax lawyer to see if you must submit Form T1135 along with your tax return.
Q: I act as a bare trustee for a family member and own non-fungible coins and tokens. Should I submit Form T1135?
A: The legal ownership of the trustee may fall under the concept of "specified foreign property." An interest in any property that is defined foreign property is considered "specified foreign property" under the definition's clause (h). This can protect the bare trustee's claim to legal ownership of the digital assets that make up the bare trust. The cost of such interest to the bare trustee should be minimal, though, given they simply have their legal ownership of the digital assets. Therefore, a bare trustee will probably not be able to achieve the $100,000 valuation criterion, even if the net legal ownership of the digital assets fits the criteria of "specified foreign ownership". The tax code in Canada is rather complicated. For guidance on your Canadian tax reporting responsibilities if you hold assets, such as cryptocurrencies or non-fungible tokens, as a bare trustee, contact our Certified Tax Specialists. Consider our helpful crypto tax tips.
Only general information is provided in this article. Only as of the publishing date is it current. It hasn't been updated, therefore it could no longer be relevant. It cannot or ought not to be relied upon since it does not offer legal advice. Each tax circumstance is unique to its facts and will be different from the instances described in the articles. You should speak with a lawyer if you have particular legal inquiries.