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CRA’s New Trust Reporting Requirements and the Impact on Bare Trusts

4 minute read
Also authored by: Greg Woodward

The CRA has introduced new trust reporting requirements that apply to all express trusts (with a few exceptions) with taxation years ending after December 30, 2023. Express trusts are those created with express written or verbal intent by the Settlor – the person creating the Trust.

A major change with the new reporting requirement is the requirement to file an annual T3 trust income tax return for a bare trust.  Prior to the 2023 taxation year, bare trusts were generally excluded from any filing requirement.

What is a Bare Trust?

A bare trust is a type of trust in which one person’s name is shown as the legal owner of an asset (the trustee), but the beneficial owner of the asset belongs to someone else (the beneficiary). With a bare trust arrangement, the trustee has no discretion over the asset and must follow the directions of the beneficiary. Any income, profits and/or gains realized on the trust property are taxed in the beneficiary’s hands.

While a bare trust agreement is often recommended, a formal trust agreement does not need to be created in order for a bare trust to exist, and in fact, there are likely to be many informal scenarios where the parties involved do not know that a bare trust relationship exists.

Bare trusts are often created through an estate plan where, for example, legal ownership of a property is held by a corporation or by an individual, but beneficial ownership rests with a separate individual. The main reason for this type of arrangement is often to reduce probate fees (estate administration tax) payable on the value of the real estate given that the registration is in the name of a corporation or another individual, rather than the deceased individual, and therefore the title can be transferred without the requirement of probate (now called a Certificate of Appointment of Estate Trustee). An individual holding title as bare trustee can create some additional complexities, and as such, a corporation holding title as a bare trustee is generally a preferred route, despite the ongoing work to maintain a corporation annually.

With this type of estate planning, it is important to keep a cost/benefit analysis in mind to ensure that the benefits that the estate is expected to receive by way of probate fee savings go well beyond the expenses of creating and maintaining this estate planning strategy. These costs include, among other things, the legal and accounting fees to incorporate and organize a new corporation, and then continue to maintain it. One such cost will be the expense of filing the T3 Trust Return annually.

Filing requirements

The filing deadline for trusts with a December 31, 2023 year-end is April 2, 2024. Of note, the new reporting requirements require additional information which was not previously required for filing to now be reported on a T3 Schedule 15, “Beneficial ownership information of a trust”. This additional information includes the name, address, date of birth, jurisdiction of residence, and tax identification number for each person who is a trustee, beneficiary, or settlor. Failure to comply with the filing requirements may result in significant penalties. However, given the nature of the new rules, the CRA has indicated that it will provide relief to bare trusts by waiving the penalty for the 2023 tax year in situations where the T3 Trust Return and Schedule 15 are filed after the deadline. However, if the failure to file the T3 Trust Return and Schedule 15 is done knowingly or due to gross negligence, a penalty may be applied.

Additional Information

Individuals should seek legal and/or accounting advice as soon as possible in order to ensure they are clear on what the requirements are for, and whether their situation falls into the new reporting rules for a bare trust. If so, trustees should be diligent in collecting the required information to complete the T3 Trust Return and Schedule 15 before the filing deadline.

The new reporting requirements are a good reminder that while many types of estate planning offer relief from probate fees or other benefits, it is imperative that advisors and their clients stay up to date on changes in the law and that a cost/benefit analysis for the estate planning you have in place is regularly reviewed.

Should you have questions about your own estate planning or the new trust reporting rules, you can contact Hilary Leitch, a lawyer in our Wills & Estates group.

Special thanks to articling student Greg Woodward for his assistance in preparing this article.

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Hilary A. Leitch

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