Updated: March 28, 2024
The CRA has announced that bare trusts are not required to file a 2023 T3 return, unless the CRA requests it. This includes the new T3 Schedule 15 “Beneficial ownership information of a trust”. Previously, the CRA said that it would waive the basic late-filing penalty for bare trusts filing a 2023 T3 return and it would only apply the gross negligence penalty in limited circumstances.
The CRA announced this relief on March 28, 2024. No relief is available to other types of trusts.
Generally, you’ll be required to file a tax return for bare trusts under the new trust reporting rules. The new trust reporting rules apply to trusts with tax years ending on December 31, 2023 and onward. Failure to comply with the new reporting rules may result in potentially significant penalties, including the new gross negligence penalty.
These rules, which were included in Bill C-32, came into effect on December 15, 2022 when the bill received Royal Assent.
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. 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 to:
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 has changed with the new reporting requirements. It should be noted that the new reporting requirements only change the reporting obligation of bare trusts and not the tax treatment of bare trusts.
Under the new reporting requirements, the trustee of a bare trust must file an annual T3 trust return for tax years ending after December 30, 2023. This means that trusts with a calendar year-end will be subject to the new rules starting with the December 31, 2023 year end. 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).
The deadline for filing a trust return is 90 days after the taxation year-end.
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.
If a bare trust fails to file a trust return under the new legislation, the late-filing penalty is $25 a day (minimum $100, maximum penalty of $2,500). An additional penalty equal to the greater of $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.
However, 2023 bare trust returns are only required if requested by the CRA under its transitional relief.
It’s critical for trustees to familiarize themselves with the new rules due to the greater compliance requirements in comparison to prior years. The new requirements are complex, and the penalties are significant. We can help you navigate them—contact your local advisor or reach out to us here.
For more guidance, see CRA’s website.
Disclaimer
The information contained herein is general in nature and is based on proposals that are subject to change. It is not, and should not be construed as, accounting, legal, or tax advice or an opinion provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, specific circumstances or needs and may require consideration of other factors not described herein.
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