Canada’s New Reporting Requirements for Bare Trusts

Bare trusts will be required to file a T3 Return, and report beneficial ownership information on Schedule 15. The new trust reporting rules apply for tax years ending after December 30, 2023. Failure to comply may result in potentially significant penalties.

What is a bare trust?

A “bare trust” is broadly defined in the Income Tax Act (1), as an arrangement under which a trust can be reasonably considered to act as an agent for all beneficiaries with respect to all dealings with the trust’s property. (2)

The Canada Revenue Agency (“CRA”) defines a bare trust as a trustee which has no obligations other than to deal with the trust’s property as instructed by the beneficiaries. 

The broad definition could capture a wide range of arrangements including:

  • trusts established to ensure privacy and anonymity, holding registered title to real property;
  • trusts holding legal title of a property on behalf of a group of owners in a joint venture or partnership;
  • trusts established minimize land transfer taxes or probate in transactions where beneficial ownership of a property is being transferred between parties;
  • addition of child on bank accounts or non-registered investment accounts (i.e., accounts “in trust”); and
  • gifts of property to a minor child or children who cannot hold a legal title.

Application of reporting requirements

The trustee of the bare trust must file an annual T3 Return for tax years ending after December 30, 2023 including the following information:

  • identify the type of trust as “code 307, Bare Trust”;
  • provide the trust creation date;
  • if this is the first year of filing send the written trust document to the CRA, or if there are no written documents, submit a written summary of the nature of the trust arrangement;
  • answer the tailoring questions on page 2 of the return; and
  • complete the certification section.

The remaining parts of the T3 Return may be left blank, as all income from the trust property for a taxation year should be reported on the beneficial owner’s return of income.

Report beneficial ownership information on Schedule 15 including, for all trustees, settlors (3), beneficiaries, controlling persons (4) including:

  • name;
  • address;
  • date of birth (if applicable);
  • country of residence; and
  • Tax Identification Number (5).

Bare trusts that have been in existence for less than three months, or that hold less than $50,000 in assets throughout their year (provided their holdings are limited to deposits, government debt obligations, and listed securities) may be exempt from the new reporting requirement.

Deadline for reporting

The deadline to file the T3 Return and related Schedule 15 is 90-days after the taxation year-end of the bare trust.

Penalties

If a bare trust fails to file under the new legislation, the late-filing penalty would be $25 per day (with a minimum of $100 and a maximum penalty of $2,500). 

The CRA may, at their discretion, provide penalty relief for the 2023 tax year in situations where the T3 Return and related Schedule 15 for bare trusts are filed after the filing deadline, considering the transition to new legislation in the year.

However, if the failure to file was made knowingly or due to gross negligence, a different penalty may apply equal to the greater of $2,500 and 5% of the maximum value of the property held during the taxation year by the trust.

Next steps

Trustees must familiarize themselves with the new rules due to the heavier burden to report information as compared to prior years where, generally, no tax filing was necessary. These new requirements are complex, and penalties can be significant. 

In many cases, it will take additional time for the trustee to gather information from various parties, particularly, in cases where a bare trust has not filed a T3 return in the past. 

Any arrangement where the beneficial ownership is separate and distinct from legal ownership should be analyzed to determine if it qualifies as a bare trust relationship.

Consider dissolving any dormant trusts in to minimize future compliance obligations and mitigate exposure to new penalties. However, a dormant trust that is dissolved within any given tax year during or after 2023 will still be subject to the trust reporting rules for its final taxation year.

Trustees should apply for a trust account number as soon as possible, providing them with flexibility to electronically file the T3 Return and related Schedule 15. The most efficient way to obtain a trust number is using CRA’s Trust Account Registration online through My Account or My Business Account.

If you would like more information on how these changes may affect you and your trust, please contact a member of our team.

References

(1) All references in this article are to the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.), unless otherwise indicated.

(2) Subsection 150(1.3), Bare trusts and arrangements – inclusion.

(3) “Settlor” is defined in subsection 17(15) as “a person … who has loaned property or transferred property, directly or indirectly, in any matter whatever, to a trust for the benefit of the trust …” for example, if a loan is made at a low-interest rate that is less than fair market value to a trust (i.e., non-arms length) the person would be considered a settlor under this definition.

(4) Controlling persons are persons who have the ability, through terms of the trust or a related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust.

(5) i.e., Social Insurance Number, Business Number, Trust Number, or, in the case of a non-resident trust, the identification number assigned by a foreign jurisdiction.

Disclaimer

Our disclaimer, which can be accessed at https://kpcpa.ca/disclaimer/, forms an integral part of and must be read in conjunction with, this guide.