Dec 18, 2024
The Canadian Revenue Agency (CRA) has recently announced that bare trusts are not required to file T3 returns and Schedule 15 for the 2024 tax year, extending from a similar exemption for the 2023 tax year. Before the exemption, new tax rules for trusts were scheduled to become effective starting from the 2023 tax year, requiring nearly all trusts, including bare trusts, to file returns annually.
These rules were unveiled in the government’s 2022 fall economic statement and were designed to address money laundering, terrorist financing, and tax evasion.
However, many Canadians with simple bare trust arrangements were found facing unexpected costs and difficulties in obtaining required information and in preparing the paperwork, forcing the government to provide temporary relief while considering the amendments to these new rules for a more practical approach.
What is a Bare Trust?
For income tax purposes, a bare trust is a trust arrangement with a singular function, holding legal ownership of the trust property, where the beneficiaries hold the beneficial ownership. The bare trustee has no other significant powers or responsibilities and must take instructions from the beneficiary for each dealing with the trust property. The trustee, therefore, can reasonably be considered to act as an agent for the beneficiaries under the trust.
Some bare trusts can be very simple. For example, parents hold property in trust for their underage children, or adult children hold property in trust for their elderly parents. Other bare trusts can be more complicated. For example, a property developer sets up a bare trust that holds the registered title to the real property.
New Reporting Requirements for Trusts
The new reporting requirements, starting from the 2023 tax year, compel nearly all trusts, including bare trusts, to file a T3 return and Schedule 15 every year.
Specifically, an express trust that is resident in Canada and is not a listed trust is required to file an annual T3 return. An express trust is a trust created with express terms, usually in writing, distinguished from an implied trust, which is inferred by law from the conduct or dealings of the parties involved.
Listed trusts include, among other things, a trust that has been in existence for less than three months, a trust that holds only certain assets (cash, share, mutual fund unit, trust interest, debt obligation, etc.) with a total fair market value of less than or equal to $50,000, a trust required by a rule of professional conduct (e.g. a lawyer’s general trust account), or a registered charity.
All other types of trust, including listed trusts, whether resident in Canada or not, are otherwise required to file annual T3 returns when they, amongst other conditions, have tax payable in Canada, have taxable capital gains in Canada or dispose of a taxable Canadian property, are deemed a resident trust in Canada, or are requested by the CRA to file.
Where it is required to file a T3 return, the trust, except for listed trusts, must also file Schedule 15 on Beneficial ownership information of a trust, providing information of all reportable entities of the trust. Reportable entities include the trustees, settlors, beneficiaries and controlling persons (those who have the ability to exert influence over the trustees) of the trust.
Please note this is just a quick summary of the types of trusts and their respective filing obligations. A trust should always consult with an experienced Canadian tax lawyer to clarify its compliance requirements under tax law.
Exemption to the New Reporting Requirements for Bare Trusts
The new reporting rules are supposed to cover bare trusts as well, but bare trusts have been temporarily exempted for the 2023 and now for the 2024 tax years, unless specifically requested by the CRA to file.
This is the result of the amount of grievance from many Canadians who have completely innocent bare trust arrangements (such as parents holding property in trust for underage children or adult children holding property in trust for elderly parents) and now have to spend hundreds of dollars to have accountants prepare the filings for them.
The Department of Finance has proposed some amendments to the rules. It is possible that the proposed amended rules will become effective for the 2025 tax year. When that happens, a trust should seek an experienced Canadian tax lawyer to review the rule changes in order to adjust its filing appropriately.
Pro Tax Tip – Always watch out for the CRA’s request to file
Even though bare trusts are exempted from filing requirements for the 2023 and 2024 tax years, the CRA has the power to request a particular trust to file. Therefore, although a bare trust can generally assume it does not have to file a T3 return and Schedule 15 for 2023 and 2024, it should always keep an eye out for a communication from the CRA. If it does receive such a request, the bare trust should consult with an experienced Canadian tax lawyer to confirm if it needs to comply and file accordingly.
FAQ
If a trust has no income to report or no information is changed from the previous year, is it still required to file a return and Schedule 15?
Yes. The filing requirement is on an annual basis. When there is no income, the trust would report an income of “Nil” on its T3 return. When the beneficial ownership information is unchanged from the previous year, the trust would answer “No” to the second question in Part A of Schedule 15; the information from the previous year will be carried forward, and the trust does not need to provide the information again on current year’s Schedule 15.
My bare trust received a request to file from the CRA, but I was not prepared and thus filed late. What will happen?
For the 2023 tax year, the CRA adopts an education-first approach. If a bare trust was requested to file and filed after the deadline (which is 90 days after the trust’s tax year-end), the CRA would waive the penalty payable, except in case of gross negligence. Please note that, at the moment, this waiver is only applicable to the 2023 tax year. Hence, for the 2024 tax year, a trust should be prepared to file on time if it is directly requested by the CRA to file.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
