CRA provides temporary relief for bare trusts under expanded reporting regime

With the federal government’s expanded trust reporting regime taking effect later this month, the Canada Revenue Agency (CRA) has granted temporary relief to bare trusts, which will be subject to filing requirements for the first time.

Bare trusts that file late for the 2023 tax year will not incur late-filing penalties, the agency announced Friday.

The new trust reporting rules — effective for trusts with year ends of Dec. 31, 2023, and after — apply to more types of trusts, including bare trusts. Trustees also are required to report information such as the names, addresses and social insurance numbers of beneficiaries and other parties connected to a trust.

Trustees affected by the new rules must file a T3 trust return along with a new Schedule 15 beneficial information return by the filing deadline of March 30 (April 2 in 2024).

“You don’t want to be waiting until the last minute [to collect the data],” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S. Trustees may find that beneficiaries of the trust are unreachable, unresponsive or unwilling to provide the information. If a beneficiary’s data is unavailable, “you want to document that you made a reasonable attempt.”

“Most bare trusts are not formally documented — there’s no trust indenture that goes along with them in the same way that, say, a family trust might have,” said Stephen Latimer, tax partner with Grant Thornton LLP in Halifax. “The big risk here is that a lot of clients may not recall putting these bare trusts in place.”

In guidance released Dec. 1, the CRA indicated there will be no penalties for filing a trust return and a Schedule 15 for bare trusts after the deadline for the 2023 tax year. However, the filing requirement remains in effect. If the failure to file is made knowingly or due to gross negligence, penalties may apply, the CRA stated.

“CRA recognizes that the 2023 tax year will be the first time that bare trusts will have a requirement to file a T3 return including the new Schedule 15,” the agency stated. “As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing proactive relief.”

The new reporting rules also include a new penalty for failing to file: $2,500 or 5% of the property’s value, whichever is greater, in addition to existing penalties for failure to file a trust return.

Advisors should be “asking [clients] questions about [whether they have] any trusts that have been settled in the past that we’re not aware of — making sure we’re flushing that information out — to protect them from those non-compliance penalties,” Latimer said.

In December 2022, Ottawa passed legislation to expand the trust reporting rules to include express trusts (created with a settlor’s express intent) and bare trusts (in which a trustee’s only duty is to transfer property to a beneficiary on demand). Previously, only trusts with taxes payable for the year or those that disposed of capital property had to file an annual trust return.

Many clients will have a reporting obligation and not know it, Oakey said.

For example, a parent co-signing a mortgage with an adult child might constitute a bare trust, with the parent being the legal owner of the property and the child the beneficial owner.

Common trusts set up for estate planning purposes, such as alter ego, joint partner and spousal trusts also now have a reporting requirement.