Bare trusts exempted from 2024 filing requirement

“[T]he government is clarifying bare trust reporting rules to significantly reduce the number of Canadians with bare trusts who would have to file, and ease the related administrative burden when reporting requirements begin for the 2025 tax year,” said Shanna Taller, a spokesperson for the Department of Finance, in an email.

The draft legislation effectively removes the filing requirement for this year and exempts more bare trusts from the expanded trust reporting rules.

Earlier this year, the Canada Revenue Agency (CRA) provided a blanket filing exemption to bare trusts for the 2023 tax year a few days before the trust return filing deadline of April 2, 2024. The last-minute reversal led to widespread frustration among tax practitioners and their clients, prompting a review by the Taxpayers’ Ombudsperson.

With the changes proposed in the draft legislation, bare trust filing “is a 2025 problem [now],” said Ryan Minor, director of taxation with CPA Canada in Toronto. The move gives Finance and the CRA more time to provide guidance on filing requirements for bare trusts, he added.

In explanatory notes published Aug. 15, Finance said the draft legislation “more clearly define[s] the beneficial ownership arrangements that are subject to the reporting rules” under a “deemed trust” subsection of the Income Tax Act that would take effect for trusts with year-ends in 2025.

The deemed trust subsection essentially indicates that an “express trust” includes an arrangement in which a person legally owns a property they’re holding for the benefit of another person, and the legal owner is considered to act as an agent for the person who benefits from that property.

The subsection’s wording “describes bare trust arrangements” and makes clear that “absent a permitted exception, these bare trusts would have to file a [trust] return” under the expanded trust reporting rules, said Emily Mantle, founder of CPA Compass in Sudbury, Ont.

The government also proposed broader trust reporting relief.

Under the draft legislation, a trust — including a bare trust — will be exempted from a filing requirement when: all trustees and beneficiaries are related to each other; the fair market value (FMV) of the property doesn’t exceed $250,000; and the trust’s assets consist only of cash, GICs, mutual funds, personal-use property and securities traded on a designated exchange (as well as certain other assets).

The draft legislation retains the existing filing exemption for trusts with a FMV of $50,000 or less, but no longer restricts the assets these trusts can hold to be eligible for the exemption. In addition, the trustees and beneficiaries need not be related to be eligible for the $50,000 exemption.

Both the $250,000 exemption and the $50,000 exemption would take effect for trusts with year-ends of Dec. 31, 2024, and later.

If passed, the new $250,000 exemption will apply to many common bare trust situations, such as when an adult child is named joint owner of a parent’s bank account to help the parent manage their finances, said Ameer Abdulla, a partner with EY Canada in Waterloo, Ont.

The threshold is high enough to “generally encompass enough average Canadian bank accounts,” Abdulla said.

“It’s welcome that they’re trying to narrow the range of circumstances which these enhanced trust reporting rules could otherwise apply,” said Henry Korenblum, president of Korenblum Wealth Inc. in Toronto.

The proposed legislation also provides a filing exemption to an arrangement where individuals are on legal title of a real property that would be the principal residence of one or more legal owners, and all legal owners are related. The provision would be effective for trusts with year-ends of Dec. 31, 2025, and later.

“This will likely be welcome news for those who own a primary home and have adult child or parent on legal title” and could otherwise have a bare trust filing requirement, Mantle said.

However, the draft legislation makes clear the government is committed to including bare trusts within its expanded trust reporting rules.

“[Taxpayers] still have the fundamental problem of, ‘Do I have a bare trust? And must I file?’,” Abdulla said.

Adam Friedlan of Friedlan Law in Richmond Hill, Ont., said in an August 14 LinkedIn post that the amendments are “helpful because they narrow the application of the rules,” but taxpayers with common arrangements will still wonder if they have a filing requirement.

“Even a seasoned tax advisor has to spend hours poring over these [trust reporting] rules to try and understand how they work,” Friedlan said. “It is not practical to have this level of legislative complexity for matters that will affect millions of people.”

The expanded trust reporting rules were originally meant to be effective for the 2021 tax year, but the effective date was delayed twice, pending the passage of enabling legislation late in 2022. The new legislation is effective for trusts with year-ends on Dec. 31, 2023, and after.

However, as the 2023 filing deadline for trusts drew nearer, taxpayers began wondering if they had a bare trust in place and sought advice on how to comply with their new filing obligations.

In December 2023, the CRA said it would not assess penalties on late-filed 2023 bare trust returns in response to the “unintended impact” the rules were having on Canadians. In mid-March of this year, the CRA said it would not assess gross-negligence penalties for failing to file 2023 bare trust returns, except in egregious situations.

On March 28, the CRA provided taxpayers with a blanket exemption from bare trust filing requirements for 2023, except in cases where the agency made a direct request to file.

The draft legislation is out for consultation until Sept. 11.

Trust reporting and bare trusts

Under common law, a bare trust exists when a trustee’s only duty is to transfer property to a beneficiary on demand. A bare trust could be used for income tax avoidance or evasion, but in most cases bare trusts are used for convenience, confidentiality, probate planning and other legitimate purposes.

Under previous legislation, generally only trusts with taxes payable for the year or those that disposed of capital property needed to file an annual trust income tax return (T3). Under the expanded reporting requirements, express trusts (as opposed to those created by law) as well as bare trusts must file a T3: Trust Income Tax and Information Return, and a Schedule 15: Beneficial Ownership Information of a Trust, with the CRA on an annual basis.

The rules require trusts to identify all beneficiaries, trustees, settlors and/or protectors of the trust, including their addresses, dates of birth and taxpayer identification numbers, such as social insurance numbers.

Certain trusts are excluded from the expanded rules. These include graduated rate estates; qualified disability trusts; mutual fund trusts and registered plans; trusts in existence for less than three months; and trusts with less than $50,000 in asset value.

In addition to the existing penalty for failing to file a T3 return on time — $25 a day, with a minimum penalty of $100 to a maximum of $2,500 — the new reporting rules introduce an additional penalty for deliberately not filing or for gross negligence: $2,500 or 5% of the property’s value, whichever is greater.