Bare Trust Reporting Requirements: New rules come into effect

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

This new requirement—proposed under the revisions to the February 4, 2022 draft legislation—could potentially have substantial tax implications, and we recommend discussing the new reporting regime with your accountant or tax professional.

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.

The person who is the true owner of the property is called the 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.

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.

Information that needs to be disclosed in filing your 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).

Some exemption to the reporting regime may apply for certain bare trusts in a particular calendar taxation year if:

• they exist for less than three months in the year;
• they hold 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; or
• they are terminated prior to their calendar taxation year end (bare trustees should exercise caution as this potential relief has not been confirmed by the government).

Under the legislation, trusts are required to file a T3 for years ending after December 30, 2023. Since these trusts are deemed to have a calendar year-end for T3 reporting, they will have to file a 2023 T3. The T3 is due 90 days after the year-end or March 30, 2024.

It should be noted that in leap years the filing deadline becomes March 30. Many bare trust corporations file a T2 corporate tax return based on an off-calendar year-end. However, their T3 filing requirement will still be based on a calendar year-end.

What are the Penalties?

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

Penalties are assessed in terms of length of non-compliance, and for real estate properties, as a percentage of the fair market value of the property, which ever is greater.

That means:

• $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 Take Away

While the new T3 reporting rules for bare and other trusts may seem concerning, a qualified accountant and/or tax professional can help you navigate them. The key is to ensure your team is prepared for the reporting deadline and the T3 requirement is part of your year-end tax strategy.

For more information on bare trusts and estate planning, please contact Rose Shawlee or Catherine Kim of our estate planning and estates group for 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.