Determining whether you have a bare trust and if you have reporting obligations can be complex. Additional trust reporting requirements now apply to most types of trusts—including bare trusts—starting with tax years ending on December 31, 2023.
These rules generally require bare trusts to file annual T3 returns, including detailed information on the stakeholders of the trust. Previously bare trusts were exempt from filing.
As administrative relief for the first year of these reporting requirements, bare trusts only have to file a 2023 T3 return upon CRA request.
In its latest update, the Department of Finance (Finance) proposes additional relief for bare trusts to give trustees more time to prepare for the new reporting requirements. Most notably, Finance proposes that a bare trust won’t be required to file a 2024 T3 return either. In addition, Finance proposes to permanently exempt certain types of bare trusts from reporting obligations.
These proposals were introduced in the August 12, 2024 draft legislation. Even if the draft legislation becomes law, most bare trusts would still be required to file T3 returns starting with the 2025 tax year.
As it takes time to gather the required information and non-compliance penalties are significant, it’s critical to identify if you have a bare trust and prepare early. To help determine your bare trust reporting obligations, contact your local advisor.
A bare trust is a specific kind of trust in which the trustee has no obligation other than to 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 essentially 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 commonly used to:
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. Contrarily, a taxable event is triggered when beneficial ownership of the bare trust property changes, even if there's 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. For this reason, no tax is calculated in the T3 return for a bare trust. However, certain information must be disclosed.
The trustee of a bare trust must generally file an annual T3 trust return for tax years ending December 31, 2023 and onwards (given that bare trusts are required to have a calendar year end). The deadline for filing a T3 return is 90 days after the taxation year-end.
As mentioned, the CRA announced relief from 2023 year-end filings for bare trusts.
Most types of trusts—including bare trusts—are also required to file T3 Schedule 15, “Beneficial ownership information of a trust” as part of their T3 return, with some exceptions. T3 Schedule 15 reports additional information (i.e., name, address, date of birth, jurisdiction of tax residence, and tax information number) about the trust’s stakeholders. 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).
However, bare trusts that have been in existence for less than three months, or that hold assets worth a total fair market value (FMV) of $50,000 or less throughout the tax year (provided their holdings are limited to deposits, government debt obligations, and listed securities) are exempt from completing T3 Schedule 15.
If changes to the trust reporting rules in the August 12 draft legislation are enacted, fewer bare trusts would be required to file a trust return compared to the current rules. However, there are still many common bare trusts that wouldn’t meet any of the proposed exemptions.
Under these proposals, bare trusts would be exempt from filing a 2024 T3 return under one-time relief. Finance also proposes to exclude certain types of bare trusts from the trust reporting requirements starting with the year ending December 31, 2025.
In addition, the proposals provide greater clarity in what constitutes a “bare trust” for the purposes of the trust reporting requirements.
Starting with 2025 T3 returns, a bare trust would be exempt from filing a T3 return under the proposals where throughout the year:
Based on these proposals, some common bare trusts that appear to be exempt include:
Note that there are still many common bare trusts that wouldn’t meet the proposed exemptions. For example, an in-trust account for the benefit of a minor child or where an adult child’s name is added to a parent’s bank or investment account to help administer it.
Finance also proposed broadening the list of exemptions from the requirement to file T3 Schedule 15, some of which are relevant to bare trusts. Notably, the following two exemptions are proposed, starting with December 31, 2024 tax years:
It’s important to note that even if a T3 schedule 15 exemption has been met for a tax year, the trust may still be required to file a T3 return.
The penalty for failing to file a T3 return on time 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 may apply where a failure to file was made knowingly or due to gross negligence.
It’s important to determine your bare trust reporting obligations in advance of the filing deadline, contact your local advisor or reach out to us here.
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 Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
