New - Bare trusts are exempt from trust reporting requirements for 2023

In recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians, the Canada Revenue Agency (CRA) will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request for these filings.

Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement. The CRA will communicate with Canadians as further information becomes available.

NEW BARE TRUST REPORTING RULES

These new trust reporting requirements may apply to you if :

1) your name has been added to your adult parent/elderly parents bank account, investment account or mutual funds,

2) if your adult parent is added on a deed/mortgage to obtain financing/mortgage,

3) if you have added your adult child’s name to a deed to avoid probate tax.

4) if you have a bank account, investment account or mutual fund set up for your minor child

If any of these situations apply to you, a bare trust arrangement exists and therefore filing a T3 trust return will likely be required. Please read below for further guidance. To comply with the new reporting rules, bare trusts are now required to file T3 trust returns and provide the enhanced reporting information of beneficiaries, trustees and the settlor on Schedule 15, with a filing deadline of April 2, 2024.

In the past, situations where trust filing was not required, may now be required. This legislation is new and evolving, the interpretation of which is still ambiguous, and we request you consult your advisor before acting on this information. These new reporting requirements will impact your 2023 trust return. We will assist you to ensure your return meets all requirements, and we may contact you to obtain additional information before the filing deadline of April 2, 2024.

DEFINITON OF A BARE TRUST ARRANGEMENT

A bare trust is a trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property. The legal title of the property remains with the trustee, but the beneficiary has all beneficial ownership of the property. A bare trust is a principal-agent relationship.

COMMON EXAMPLES OF BARE TRUST ARRANGEMENTS

Various examples of bare trust arrangements are as follows:

1) Parent’s name is added on a deed/mortgage for financing purposes. It could also be someone other than a parent, but parent is the most common arrangement. In this example, legal ownership remains with the trustee (the parent), but tax ownership is with the beneficiaries (the child). Tax owed to the CRA from income and/or capital gains would accrue to the child and since the child is living in the home, they can still claim capital gains exemption.

2) Pre-emptive tax planning: having the child’s name on the parent’s deed prior to avoid probate. By adding the adult child’s name on the adult parent’s deed, it adds the child on to legal title, which in turn creates a bare trust arrangement.

3) Adult parents add a child’s name to bank accounts, investment accounts, mutual funds. This would result in a bare trust arrangement. If multiple bank accounts with the same adult parent and child names are listed, only one bare trust arrangement exists that involves multiple bank accounts. Even if the parent is reporting income earned, the trust arrangement still exists. It’s a question of whether there is truly joint ownership of the cash, or whether the adult parent is still making all the decisions relating to the finances and the adult child is merely on the bank for probate avoidance. It is important to remember the exemption listed below, the bank account would have to be greater than $50,000.

4) Adult parents have a joint bank account, investment account, mutual fund set up for a minor child or funds are held for minor children. Likely that these funds earn income that is reported as a T3s that says ITF (in trust for). Parent likely has sole signing authority. Funds typically would come from gifts deposited to the child’s bank account. Under this arrangement, it is likely the minor child has no say, or understanding of how the funds are invested, spent, etc, and therefore the parent has full control of these funds. This presents a bare trust arrangement. It is important to remember the exemption listed below, the
bank account would have to be greater than $50,000.

Other less common arrangements:
- Mexican vacation property held by a bank trust.
- General partner of a partnership holds assets for the partnership (could not register title to real estate in the partnership)
- Foreign assets held by nominee for Canadian Resident

EXEMPTIONS FROM FILING FOR BARE TRUSTS

It is important to note that if you currently have any of the above arrangements, you may be exempt if you meet the following exemption.
- The trust will have no taxes payable.
- The trust had no dispositions of assets during the year.

AND

- The trust has been in existence for less than 3 months.
- The trust holds assets with a fair market value of under $50K and the assets must be money (cash), arm’s length loans or public securities.

If you do not meet one of these exemptions, then you must file a T3 trust return for your bare trust arrangement. These filings are due April 2, 2024.

WHAT WE NEED TO FILE YOUR RETURN

If you would like to engage us to prepare your T3 return, please see the bare trust intake form. The information we would need to file your T3 return:

 Name of trust
 Names of trustee(s)
 Names of settlor(s)
 Names of beneficiaries

The additional information required to be reported on the T3 return on schedule 15 for all trustee(s), beneficiaries and settlor(s) is as follows:

 Name
 Type and classification of entity (individual, corporation or trust)
 Address
 Date of birth (if natural person)
 Country of residence
 Taxpayer identification number, i.e., SIN, trust account number, business number

A trust is deemed to have met these new filing requirements when the information indicated above has been provided for each reportable entity whose identity is known or ascertainable, with reasonable effort at the time of filing. For those whose identity is now known or ascertainable, a trust can comply by supplying sufficiently detailed information on the T3 return to determine whether a person is beneficiary. All of this information must be gathered for the first year of filing and reported to the CRA. For the following years, modifications to this information will be necessary as required, such as changes to legal names, addresses, identification of new beneficiaries, etc.

PENALTIES FOR FAILURE TO COMPLY

The CRA has indicated they will not be applying onerous penalties in 2023, due to the complexity of these new rules.That being said, to avoid potential penalties, you must be able to prove to the CRA that you were unaware of these new rules and their application to your situation. If CRA assesses that you were in fact aware, but decided not to file, they can apply a failure to file penalty, which is the greater of $2,500 and 5% of the highest FMV of the trust assets in the year.

DEFINITIONS

Settlor: Anyone who has contributed cash, property, assets to the trust at any time during the trust’s life.
Trustee(s): an individual(s) or trust institution that holds legal title to property in trust for the benefit of the trust beneficiaries.
Beneficiary: includes the person(s) for whose benefit the trust is created, therefore the person(s) who has beneficial ownership.

RESOUCRES