Updated: November 18, 2024
Determining whether you have a bare trust and if you have reporting obligations can be complex. Additional trust reporting requirements 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.
Some relief for bare trusts
The CRA is extending its relief so that bare trusts aren’t required to file a 2024 T3 return unless the CRA requests it. Previously, this relief was only available for 2023 bare trust returns.
This announcement is in line with the draft legislation released on August 12, 2024, which proposes to remove the 2024 bare trust filing requirements and permanently exempt certain types of bare trusts from reporting obligations.
Even with this relief, 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.
What is a bare trust?
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:
- ensure privacy and maintain the anonymity of the true owner of a property when the ownership information, such as land registration records, are public record
- 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
- 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 due to administrative issues
- gift a minor child or children with property who can't hold a legal title
- hold legal title of a property on behalf of a group of owners in a joint venture or partnership
How is the income of 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. 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.
How do the current reporting requirements apply to bare trusts?
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 and 2024 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.
What are the proposed changes?
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.
Proposed exemptions from filing T3 returns
Starting with 2025 T3 returns, a bare trust would be exempt from filing a T3 return under the proposals where throughout the year:
- All beneficiaries are legal owners of the trust property, and all legal owners are beneficiaries of the bare trust.
- The legal owners are all related individuals, and the property is real property that could be designated a principal residence of at least one of these owners.
- The legal owner is an individual, the property is real property held for the use or 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 (other than a limited partner) holding the property solely for the use or benefit of the partnership, and at least one partner is required to file an information return for the partnership.
- The legal owner holds the property pursuant to a court order.
- Canadian resource property is held solely for the use or benefit of one or more publicly listed companies (or in certain cases, subsidiaries or partnership of such companies).
- Where a non-profit organization holds funds received from the federal or provincial governments for the use or benefit of other non-profit organizations.
Based on these proposals, some common bare trusts that appear to be exempt include:
- Spouses that have a joint bank account for the use and benefit of both spouses.
- A parent that is on legal title of a principal residence to allow a child to obtain a mortgage.
- Spouses that jointly occupy a family home that could be designated as a principal residence, but only one spouse is on legal title.
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.
Additional proposed exemptions from filing T3 Schedule 15
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:
- Trusts whose assets have a total fair market value (FMV) of $50,000 or less throughout the tax year (without restrictions on asset type). This would replace the current $50,000 exemption that limits the types of assets that can be held to qualify.
- Trusts that meet all the following conditions:
- All trustees and beneficiaries are individuals
- Each beneficiary is related to each trustee, and
- The total FMV of the trust property is $250,000 or less throughout the tax year, provided the trust’s holdings are limited to certain types of assets (such as deposits, guaranteed investment certificates issued by Canadian banks, debt obligations issued by the government or a publicly listed entity, personal-use property and listedsecurities).
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.
What are the non-compliance penalties?
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.
