Bare Trust Reporting Requirements: New rules come into effect

Bare trusts across Canada are now required to file annual returns with the Canada Revenue Agency (CRA) or face penalties. The new reporting regime requires most Canadian express trusts to file a T3—Trust Income Tax and Information Return—commencing in their first taxation ending after December 30, 2023.

What is a Bare Trust?

Bare trusts are a simple concept: it is where one person’s name is shown as the owner of an asset, but the asset really belongs to someone else.  In short, there is a disconnect between whose name shows as the owner and who is really entitled to the rights and risks of the asset.

The person who is the true owner of the property is called the beneficial owner, and the person whose name shows up as an owner but who really doesn’t have any entitlement to the rights and risks of the property is called a bare trustee or nominee.

While the concept is simple, bare trusts can exist in situations that aren’t at all simple, much less obvious, such as where a person has added a child to a piece of real estate or an account to avoid probate, put their name on title to a child’s home to help with financing, or transferred real estate to their trust or company without changing the registration at the Land Title Office.  For additional information about bare trusts, particularly in the estate planning context, you may find our Bare Trust article of use.

What are the Reporting Requirements?

The full scope of reporting obligations under the new T3 reporting requirement can be best answered by your accountant or tax professional, however there are a few key pieces of information to keep in mind.

Nil Return

Because the beneficial owner is entitled to all the rights of the property, the beneficial owner is entitled to all the income, gain, or loss on the property, and, in turn, such income, gain, or loss is disclosable on the tax return of the beneficial owner.  There is no income, gain, or loss within the bare trust relationship itself and, consequently, the T3 return for the bare trust will be a nil return.

Overlapping T3 Returns

This new return obligation does not replace any other return and is in addition to any existing filing obligations.   This can be a bit confusing where there is a bare trust in connection with another trust as there can be multiple T3 Returns involved.  For example:

1. a family trust, alter ego trust, or joint partner trust is the beneficial owner of a piece of real estate; and
2. Joe Smith or SmithCo is the registered owner of the real estate.

The family trust, alter ego trust, or joint partner trust has an obligation to file a T3 Return.  In that instance, it is filing showing all income, gains, and losses to that trust for the tax year, and it is basically serving the same purpose as the T1 return that a natural person files for a tax year.

Under the new regime, there will be a second T3 Return that reports the bare trust relationship between the two parties.

Information to be Disclosed

Information that needs to be disclosed in filing the T3:

• The name, address, date of birth, jurisdiction of residence and taxpayer identification number (social insurance number, business number, etc.) for each of the following persons must be disclosed:
  • The trustees;
  • The beneficiaries and where the beneficiary is not known or ascertainable with reasonable effort, the disclosure must provide “sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust”. This can be satisfied by providing a copy of the relevant trust provisions;
  • The settlors, which includes any person or partnership that made a loan or transfer of property in any manner to or for the benefit of the trust. The only exception is where (i) the person or partnership was arm’s length with the trust at the time of the loan or transfer of property and (ii) either the loan was subject to a reasonable rate of interest or the transfer was for fair market value consideration; and
  • Any person that has the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector of the trust).

It is therefore incredibly important to gather all this information and keep it current in order to avoid a mad scramble before the filing deadline.

Most Broadly Useable Exemptions

Two main exemptions to this new reporting regime will be most relevant to a typical Canadian taxpayer:

• the bare trust exist for less than three months in the year; or
• the bare trust holds no property other than cash, certain government debt obligations and certain listed securities, and the property’s value does not exceed $50,000 at any point in the year.

Filing Due Date

Under the legislation, trusts are required to file a T3 for years ending after December 30, 2023. Bare trusts are deemed to have a calendar year-end for T3 reporting.  Bare trusts in existence in 2023 that don’t fit within an exemption will have to file a 2023 T3 Return.

The T3 is due 90 days after the year-end. Typically, this will be March 31 of each calendar year (in leap years, March 30); for 2024, this has been slightly extended to April 2.

Many bare trust corporations file a T2 corporate tax return based on an off-calendar year-end. However, this bare trust T3 filing requirement is based on the calendar year and does not adjust to align with other filings of the company.

What are the Penalties?

The penalties for non-compliance with the new reporting requirements can be substantial, especially in the case of real estate.

Penalties are assessed in terms of length of non-compliance, and for real estate, as a percentage of the fair market value of the property, specifically the greater of:

• $25/day for a maximum of $2,500 and a minimum of $100; and
• 5% of the highest total fair market value of all the property held by the trust at any point during the taxation year.

Key Takeaway

While the new T3 reporting rules for bare may seem concerning, a qualified accountant and/or tax professional can help you navigate them. The key is to ensure you are prepared for the reporting deadline and the T3 Return is part of your bundle of returns.

Need guidance on the Bare Trust Reporting requirements? Contact Boughton Law’s Rose Shawlee and Catherine Kim for comprehensive advice and assistance.

This information is current to March 31, 2023 and is not a substitute for legal or tax advice and should not be relied on as legal or tax advice.