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Relief for 2023 bare trust filings

Canada Revenue Agency (CRA) has just announced that bare trusts are no longer required to file a 2023 T3 return, unless requested by CRA. This includes the new T3 Schedule 15 “Beneficial ownership information of a trust”. Previously, the CRA said that it would waive the basic late-filing penalty for bare trusts filing a 2023 T3 return and it would only apply the gross negligence penalty in limited circumstances. The CRA announced this relief on March 28, 2024. *****No relief is available to other types of trusts.*****

Below sets out what CRA had previously announced as the bare trust reporting requirements. As noted above, CRA has suspended these below reporting rules for bare trusts. However, we are of the opinion that CRA will revisit this reporting regime in the future and may attempt to re-introduce these requirements.

The CRA’s announcement only applies to bare trust arrangements and to the filing requirement imposed under new subsection 150(1.3) of the Income Tax Act (Canada). The announcement does not impact the filing requirement for express or other trusts that would otherwise be required to make T3 filings (including new Schedule 15) and to remit any tax payable by April 2, 2024.

We are closely watching developments in this area.

What are the reporting requirements? (that are now not required as per above for bare trusts)

Generally, a tax payer will be required to file a tax return for bare trusts under the new trust reporting rules. The new trust reporting rules apply to trusts with tax years ending on December 31, 2023 and onward. Failure to comply with the new reporting rules may result in potentially significant penalties, including the new gross negligence penalty.

What is a bare trust?

A bare trust is a specific kind of trust in which the trustee has no obligation other than to hold and deal with the trust property as instructed by the beneficiaries. The legal title of the trust property is held by the trustee, but the beneficiary has the beneficial ownership of the property. A bare trust is a principal-agent relationship, which means the beneficiary of a bare trust has complete control over the trustee’s action as it relates to the trust property and the trustee has no independent power, discretion, or responsibility over the property.

Bare trusts are no used to avoid tax, but are commonly used to:

ensure privacy and anonymity of the true owner of a property when the ownership information, such as land registration records, are public record; or
minimize provincial land transfer taxes or probate fees in transactions where the beneficial ownership of a property is being transferred between multiple parties, but there is no change to the legal title held by the trustee; or
to facilitate efficient property transfer in corporate reorganizations where the legal ownership of property may otherwise need to be transferred and registered multiple times, or if the legal ownership cannot be transferred at the desired time; or
to allow a gift to a minor child or children with property who cannot hold a legal title; or
to hold legal title of a property on behalf of a group of owners in a joint venture or partnership

How is a bare trust taxed in Canada?

A bare trust is generally disregarded for Canadian income tax purposes. This tax treatment allows the legal title of a property to be transferred in certain situations without triggering a taxable event when the beneficiary retains beneficial ownership of the property. However, a taxable event is triggered when beneficial ownership of the bare trust property changes, even if there is no change in legal title. All income and capital gains from the bare trust are reported on the beneficiaries’ tax return(s) and the beneficiaries are taxed—not the trust or the bare trustee. For this reason, bare trusts are, in the normal course, not required to file a trust return. The tax treatment of bare trusts have not been altered by the reporting requirements.

How do the new reporting requirements apply to bare trusts?

Under the new reporting requirements, the trustee of a bare trust must file an annual T3 trust return for tax years ending after December 30, 2023 (note, suspended for now as per above) for most bare trust arrangements. This means that trusts with a calendar year-end will be subject to the new rules starting with the December 31, 2023 year end. Under the new rules, trusts will also be required to report additional information (i.e., name, address, date of birth, jurisdiction of tax residence, and tax information number) on T3 Schedule 15, “Beneficial ownership information of a trust.” Such stakeholders include trustees, beneficiaries and settlors of the trust, and anyone who has the ability (through the trust terms or a related agreement) to exert control or override trustee decisions over the appointment of income or capital of the trust (i.e., a protector). These rules even apply to client trust funds held by lawyers.

The deadline for filing a trust return is 90 days after the taxation year-end.

What are the non-compliance penalties?

If a bare trust fails to file a trust return under the new legislation, the late-filing penalty is $25 a day (minimum $100, maximum penalty of $2,500). An additional penalty equal to the greater of $2,500 or 5% of the maximum value of the property held during the taxation year by the trust would be applied where a failure to file was made knowingly or due to gross negligence.

Disclaimer

The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal, or tax advice or an opinion provided by DJW Lawyers to the reader.