The new reporting requirements will require trustees of a trust (including a trustee of a bare trust) to file a T3 Trust Income Tax and Information Return annually for tax years ending on or after December 31, 2023.
If you don’t follow these rules, you could face penalties, including a severe one called the “gross negligence penalty.”
So, what’s a Bare trust? It’s a type of trust where the person in charge, called the trustee, only does what the people who benefit from the trust (the beneficiaries) tell them to do. The trustee technically owns the trust’s stuff, but the beneficiaries are the real owners.
People use Bare trusts for different reasons, like keeping the real owner of a property a secret when property records are public, saving money on taxes when they transfer property, making property transfers easier in business changes, giving property to kids who can’t own it legally, or holding property on behalf of a group of owners.
The trustee in a bare trust may be a nominee corporation. A bare trust relationship could be set out in a number of different legal agreements, which might be called “Bare Trust Agreement”, “Nominee Agreement”, “Declaration of Bare Trust”, or “Agency Agreement”.
Usually, for Canadian income taxes, Bare trusts don’t count as a separate “entity” required to submit its own filing. Instead, the income and gains earned by the trust are distributed to and reported by the beneficiaries on their tax return(s). It means the people who benefit from the trust report the income and pay the related taxes, not the trust itself. So, in the past, Bare trusts didn’t have to file tax returns. But that’s changed with these new rules. The rules only affect how you report the trust, not how it’s taxed.
If you’re in charge of a Bare trust, you must file a T3 Trust & Information Tax Return every year starting in 2024 if your trust year ends after December 30, 2023. If your trust year ends on December 31, 2023, this applies to you. The new rules also say you need to give more info about the people involved in the trust, like their names, addresses, social insurance number, and where they pay taxes.
You’ve got 90 days after the end of the trust’s tax year to file the T3 (it is due March 31, 2024 for a December 31, 2023 trust year-end). However, if your Bare trust is brand new (less than three months old) or has less than $50,000 in specific types of assets (like deposits, government debt, or listed securities), you might not have to follow these new trust reporting rules.
If your Bare trust doesn’t follow these new rules and doesn’t file the T3 return there could be severe financial penalties imposed. There’s a penalty for filing late, starting at $25 a day, with a minimum of $100 and a maximum of $2,500. And if you purposely don’t file or do it carelessly, you could face an even bigger penalty, either $2,500 or 5% of the most valuable thing the trust owns during the tax year, whichever is more.
In short, these new rules are important, and they can be complicated. If you’re in charge of a Bare trust, it’s a good idea to learn about them and make sure you follow them to avoid the penalties.
You can reach out to a local advisor or contact us for help with this.
