UPDATE: August 12, 2024
The Department of Finance recently proposed additional relief for bare trusts, aiming to give trustees extra time to adjust to new reporting requirements. The proposal suggests that bare trusts would not need to file a T3 return for the 2024 tax year. Furthermore, Finance intends to permanently exempt certain categories of bare trusts from these reporting requirements.
This proposal was included in draft legislation released on August 12, 2024. If enacted, these adjustments would reduce the number of bare trusts required to file trust returns compared to the current rules, although many common bare trusts would still not qualify for any proposed exemptions.
The proposed changes include temporary relief from filing a 2024 T3 return for bare trusts and propose that certain types of bare trusts would be exempt from filing obligations starting with the tax year ending December 31, 2025. Additionally, the proposals clarify the criteria for what constitutes a “bare trust” for reporting purposes.
Proposed exemptions to filing T3 returns:
Starting with the 2025 tax year, certain bare trusts may be exempt from filing a T3 return if, throughout the year:
- All beneficiaries are legal owners of the trust property, and all legal owners are also beneficiaries.
- All legal owners are related individuals, and the property qualifies as real estate eligible to be designated as a principal residence for at least one of these owners.
- A legal owner is an individual holding real estate solely for the benefit of their spouse or common-law partner, and that property could be designated as the owner’s principal residence.
- Each legal owner is a partner (not a limited partner) holding property exclusively for the partnership’s benefit, and at least one partner is obligated to file a partnership information return.
- The property is held by a legal owner in accordance with a court order.
- A non-profit organization holds funds from federal or provincial governments for the benefit of other non-profits.
Under these proposals, certain common bare trusts may be exempt from T3 filing, such as:
- Spouses with a joint bank account for their mutual benefit.
- A parent on the title of a child’s primary residence to help secure a mortgage.
- Spouses living in a jointly occupied family home where only one is on the title but it can be designated as a principal residence.
However, some bare trusts would not qualify for these exemptions. For example, where an adult child has been added to a parent’s bank or investment account to help administer it, or an in-trust account for a minor or an adult child.
The Department of Finance also suggested expanding exemptions from filing the T3 Schedule 15 which requires the disclosure of detailed information for each trustee, beneficiary and settlor of the trust, as well as any person who has the ability to exert influence over trustee decisions regarding the allocation of trust income or capital in a year. To be exempt from filing the T3 Schedule 15, the trust must meet the following conditions:
- Each trustee of the trust is an individual;
- Each beneficiary is an individual who is related to the trustee; and
- The total fair market value of the trust’s property does not exceed $250,000 throughout the year, and the trust’s only assets held throughout the year are one or more of the following:
- Cash;
- A guaranteed investment certificate (GIC) issued by a Canadian bank or trust company;
- A debt such as a bond or debenture issued by a government agency where the interest is fully exempt interest;
- A debt obligation, such as a bond issued by:
- A Canadian publicly traded corporation, mutual fund trust or partnership;
- A foreign publicly traded corporation; or
- A Canadian branch of a foreign bank.
- A share or debt listed on a designated stock exchange;
- A share of a mutual fund corporation;
- A unit of a mutual fund trust;
- An interest in a related segregated fund trust;
- An interest as a beneficiary under a publicly traded trust;
- Personal-use property of the trust; or
- A right to receive income on property described above.
As a result, smaller trusts without any corporate trustee, corporate beneficiary and assets that meet the above criteria with a total fair market value of $250,000 or less would be exempt from the enhanced reporting requirements (Schedule 15).
Moreover, amendments have been proposed for smaller trusts that hold assets with a total fair market value of $50,000 or less to also be exempt from the enhanced reporting requirements even if those trusts have corporate trustees or whose beneficiaries may not be an individual who is related to each trustee. Under the existing legislation, the “small trust” exception only applied where the trust held certain types of property; the proposed amendments have removed any exclusions based on the types of property held for the “smaller” trusts.
Even if a trust qualifies for a T3 Schedule 15 exemption, it may still need to file a T3 return for that tax year.
Navigating the New Trust Reporting Rules in Canada with In-depth Insights on Bare Trusts
The Canadian government’s new trust reporting rules, effective from the 2023 tax year onward, aim to enhance transparency and ensure accurate reporting of income generated within trusts. These changes apply to various trust structures, including family trusts, testamentary trusts, alter ego trusts, and notably, bare trusts. T3 Returns and disclosure forms for taxation years ending on or after December 31, 2023, must be filed by April 2, 2024.
Key Highlights:
Enhanced Disclosure Requirements: All trusts, including bare trusts, must adhere to more detailed reporting. This includes identifying trustees, beneficiaries, and settlors, including names, addresses, and Social Insurance Numbers. Specific transactions and events, such as distributions and contributions, must also be reported. Under these rules, beneficiaries include persons who currently have a right to income or capital as well as those having residual or contingent interests. As a result, some beneficiaries might not know that they have an interest in the trust, which could cause issues when collecting information from them.
A trust would be considered to have met the reporting requirements if it provides this information for each trust beneficiary whose identity is known or ascertainable, with reasonable effort at the time of filing. For beneficiaries whose identities are not known or ascertainable, a trust can comply by supplying sufficiently detailed information on the T3 return to determine with certainty whether any particular person is a beneficiary.
Penalties: The updated reporting rules also introduce a new penalty for non-compliance: either $2,500 or 5% of the property’s value, whichever is greater. This is in addition to the existing penalties for the failure to file a trust return. In guidance issued on December 1, the CRA announced that no penalties would be imposed for submitting a trust return and a Schedule 15 for bare trusts after the 2023 tax year deadline. It’s important to note that the filing requirement remains in place, and penalties may be applied for knowingly or grossly negligent failures to file, according to the CRA. Recognizing that the 2023 tax year marks the first instance where bare trusts must file a T3 return with the new Schedule 15, the CRA is taking an education-first approach to compliance and offering proactive relief to address potential uncertainties among bare trusts about these new requirements.
Common Exceptions:
- Trusts which have been in existence for less than three months at the end of the year;
- Trusts which hold less than $50,000 in assets throughout the taxation year (provided their holdings are confined to cash, certain debt obligations, and listed securities)
- Estates that qualify as graduated rate estates during the initial 36 months after the individual’s death
- Trusts that qualify as non-profit organizations or registered charities
Insights on Bare Trusts – Real-Life Examples: Bare trusts are a simple concept; it is where one person’s name is shown as the owner of an asset, but the asset truly belongs to someone else. The trustee is merely vested with legal title and has no independent duties or powers concerning the trust property. The trustee’s sole responsibility is to deal with the property as the beneficiary directs. The beneficiary retains the full beneficial ownership of the property in question, and, as a result, the income and gains realized on the trust property are taxed in the beneficiary’s hands.
Adding Children on Title to a Family Home or Cottage:
Scenario: Parents put property in their children’s names for estate planning purposes, or to minimize probate tax, with the parents retaining beneficial interest.
This joint ownership typically results in the creation of a bare trust, where the adult child becomes the trustee, holding legal title but with limited authority. The parent, as the settlor and sole beneficiary, retains control over decisions related to the property. The adult child acts solely on the parent’s instructions and cannot take any action without their direction.
For instance, if the parent decides to sell the family home, the adult child’s role is to convey legal title based on the parent’s instructions. The proceeds from such a sale entirely benefit the parent.
Reporting Obligation: The bare trust, in this case, involves children holding legal title while the parents are the settlors and the beneficiaries. The children must report the details of the property and the beneficial interest held by the parents.
Parents Holding Partial Title on Children’s Property:
Scenario: Parents and children jointly own a property, with each party having a distinct share in the property.
In the current competitive real estate market, it’s not uncommon for parents to agree to be included on the deed and mortgage for their adult child’s home. This helps facilitate the child’s eligibility for a mortgage even though the parents haven’t financially contributed to the purchase and won’t have any active responsibilities concerning the property. In this case, it is likely a bare trust has
been created.
Reporting Obligation: In this scenario, each party’s ownership interest must be disclosed. The trustees, in this case, are both the parents and the children and the reporting should outline the specifics of each party’s share.
Joint Bank Accounts:
Scenario: A parent includes their child as a joint owner of a bank account, allowing the child to assist with tasks like bill payments and other banking matters on behalf of the parent. Both individuals acknowledge that the funds in the account are intended exclusively for the parent’s benefit.
Reporting Obligation: The trust reporting requirements may extend to joint bank accounts where one party holds legal title, and the other party is a beneficiary. The details of the account, including transactions and beneficial interests, must be accurately reported.
In-Trust-For Accounts:
Scenario: A parent deposits money into an “in-trust” account for the benefit of a minor family member. In this arrangement, the minor, designated as the beneficiary, has the right to close the account and access all funds once they reach the age of 18.
Reporting Obligation: The trust reporting requirements may extend to informal “in-trust-for” accounts where one party holds legal title, and the other party is a beneficiary. The details of the account, including transactions and beneficial interests, must be accurately reported.
Conclusion
Staying informed about the new trust reporting rules, especially concerning bare trusts, is critical for trustees. It is crucial to note that bare trusts will now be required to file a T3 tax return, adhering to the enhanced disclosure requirements outlined by the Canadian government. Our team is here to support you in adapting to these changes and ensuring a seamless transition. If you have any questions or require further clarification on how these changes may impact your specific bare trust situation, please do not hesitate to reach out to us. We are committed to assisting you in navigating the evolving landscape of
tax regulations.