You’ll be required to file a tax return for Bare trusts under the New Trust Filing Requirements. Failure to comply with the new reporting rules may result in potentially significant penalties, including the new gross negligence penalty. If enacted, the new trust reporting rules will apply to trusts with tax years ending on December 31, 2023 and onward.
What is a Bare trust?
A Bare trust is a specific kind of trust in which the trustee has no obligation other than to deal with the trust property as instructed by the beneficiaries. Bare trusts are commonplace. A bare trust agreement facilitates the separation of legal and beneficial ownership of property. They are commonly used to facilitate cost-efficient transfers of property. An elderly parent adding an adult child to a joint bank account for their benefit, may have retained beneficial ownership of the account but has conveyed legal title to their child, for example.
The legal title of the trust property is held by the trustee, but the beneficiary has the beneficial ownership of the property. A Bare trust is essentially a principal-agent relationship, which means the beneficiary of a Bare trust has complete control over the trustee’s action as it relates to the trust property and the trustee has no independent power, discretion, or responsibility over the property.
Bare trusts are commonly used for the following purposes:
- To ensure privacy and maintain the anonymity of the true owner of a property when the ownership information, such as land registration records, are public record
- To minimize provincial land transfer taxes or probate fees in transactions where the beneficial ownership of a property is being transferred between multiple parties, but there is no change to the legal title held by the trustee
- To facilitate efficient property transfer in corporate reorganizations where the legal ownership of property may otherwise need to be transferred and registered multiple times, or if the legal ownership cannot be transferred at the desired time due to administrative issues
- To gift a minor child or children with property who cannot hold a legal title
- To hold legal title of a property on behalf of a group of owners in a joint venture or partnership
How is a Bare trust taxed in Canada?
A Bare trust is generally disregarded for Canadian income tax purposes. This tax treatment allows the legal title of a property to be transferred in certain situations without triggering a taxable event when the beneficiary retains beneficial ownership of the property. Contrarily, a taxable event is triggered when beneficial ownership of the Bare trust property changes, even if there is no change in legal title. All income and capital gains from the Bare trust are reported on the beneficiaries’ tax return(s) and the beneficiaries are taxed—not the trust. For this reason, Bare trusts are traditionally not required to file a trust return, however, this will change if the new reporting requirement is enacted. It should be noted that the proposed amendments only change the reporting obligation of Bare trusts and not the tax treatment of Bare trusts.
How does the new reporting requirement apply to bare trusts?
Per the proposed draft legislation, the trustee of a Bare trust will have to file an annual T3 trust return for tax years ending after December 30, 2023. Under the new rules, trusts will also be required to report additional information (i.e., name, address, date of birth, jurisdiction of tax residence, and tax information number) about their stakeholders on T3 Schedule 15, “Beneficial ownership information of a trust.” Such stakeholders include trustees, beneficiaries and settlors of the trust, and anyone who has the ability (through the trust terms or a related agreement) to exert control or override trustee decisions over the appointment of income or capital of the trust (i.e., a protector).
Bare trusts that have been in existence for less than three months, or that hold less than $50,000 in assets throughout the tax year (provided their holdings are limited to deposits, government debt obligation, and listed securities) may be exempt from the new reporting requirement.
What are the non-compliance penalties?
If a Bare trust fails to file a trust return under the new proposals, the penalty would be $25 a day (minimum $100, maximum penalty of $2,500). An additional penalty equal to $2,500 or 5% of the maximum value of the property held during the taxation year by the trust would be applied where a failure to file was made knowingly or due to gross negligence.
As of the date of this article, the proposed legislative amendments have not received Royal Assent.
It’s critical for trustees to start familiarizing themselves with the new rules due to the greater compliance requirements in comparison to prior years. The proposed requirements are complex, and the penalties are significant.
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