What you need to know about bare trusts

Note: On March 28, the Canada Revenue Agency announced that bare trusts would not have to file a T3 trust return or a Schedule 15 for 2023 trusts under expanded trust reporting rules, unless the CRA made a direct request for these filings. The CRA took the decision to exempt 2023 bare trusts “in recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians”. The agency said that it would work with the Department of Finance over the coming months to further clarify its guidance on the bare trust filing requirement. 

Do you hold an account “in trust” for a child, or is your name on the deed for a property that isn’t yours for convenience reasons?

If so, you may be part of an arrangement known as a bare trust, which means that this year and beyond, a trust return must be filed with the Canada Revenue Agency (CRA). There are hefty penalties associated with failing to do so.

Fortunately, because this requirement is brand new for 2023, the CRA has said it will not impose penalties on taxpayers who file a return for a bare trust late except in “the most egregious cases” for 2023. 

April 2 is the deadline for the trustee of a bare trust to file the T3: Trust income tax and information return for 2023.

A bare trust exists when a trustee’s only duty is to transfer property to a beneficiary on demand. However, the CRA has not indicated whether even common structures are bare trusts, leading to confusion, said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S.

“If my parents are getting older and they put my name on the deed to their property, to their principal residence, is that a bare trust? We think the answer is yes, but the CRA hasn’t provided an answer yet,” Oakey said. “If my kids inherit money from their grandparents, and I put it in trust for them because they’re minors, we think that’s a bare trust, but the CRA hasn’t provided any guidance yet.”

The CRA’s guidance said a bare trust for income tax purposes “is a trust arrangement under which the trustee can reasonably be considered to act as an agent for all beneficiaries under the trust with respect to all dealings with all the trust property.”

One example of a bare trust given by the CRA is when a property developer holds registered title to real property for privacy reasons, while the developer retains beneficial ownership of the property.

As for the penalty relief, the CRA had already stated in December that it wouldn’t apply penalties — $25 per day late, with a minimum of $100 to a maximum of $2,500 — for filing a trust return and a Schedule 15 for bare trusts after the deadline.

However, the CRA also said at the time that if the failure to file was done knowingly or due to gross negligence, the agency could apply a penalty of $2,500 or 5% of the fair market value of the property held by the trust, whichever is greater.

In updated guidance released March 12, the CRA said it would not apply gross-negligence penalties for late filing of bare trusts for 2023, except in “the context of a compliance action, such as an audit, where all factors and circumstances of the taxpayer’s situation are considered together.”

The expanded relief from penalties will provide “more comfort for those who are still trying to verify whether or not they do indeed have a filing obligation,” said Aaron Hector, private wealth advisor with CWB Wealth in Calgary. “They don’t need to rush into a filing until they know for sure it is necessary.”

The CRA has said the relief from penalties will apply for 2023 and only for bare trusts, as opposed to other trusts, as “the CRA recognizes that the 2023 tax year will be the first year that bare trusts will have a requirement to file a T3 return including the new Schedule 15.”

The CRA did not provide a time limit for the administrative relief from penalties for bare trusts in 2023. However, the filing requirement for 2023 and subsequent years for trusts, including bare trusts, remains.

The deadline for filing a T3 return is 90 days after the trust’s year end. For trusts with a 2023 calendar year end, the deadline for filing the return is March 30, 2024. However, as that’s a Saturday and April 1 is Easter Monday, the CRA said it will consider the T3 return to be filed on time if the agency receives it, or it’s postmarked, by Tues., April 2.