Tax Tip Thursday

I want to provide an update on the Bare Trust fiasco that happened earlier this year.

The expanded trust reporting rules were originally meant to be effective for the 2021 tax year, but the effective date was delayed twice, pending the passage of enabling legislation late in 2022. The new legislation is effective for trusts with year-ends on Dec. 31, 2023, and after. However, as the 2023 filing deadline for trusts drew nearer, taxpayers began wondering if they had a bare trust in place and sought advice on how to comply with their new filing obligations.

In December 2023, the CRA said it would not assess penalties on late-filed 2023 bare trust returns in response to the “unintended impact” the rules were having on Canadians. In mid-March of this year, the CRA said it would not assess gross-negligence penalties for failing to file 2023 bare trust returns, except in egregious situations.

On March 28, the Canada Revenue Agency (CRA) provided a blanket filing exemption to bare trusts for the 2023 tax year a few days before the trust return filing deadline of April 2, 2024. The last-minute reversal led to widespread frustration among tax practitioners and their clients, prompting a review by the Taxpayers’ Ombudsperson.

This was a huge source of contention for both tax payers and accountants! So, the Department of Finance has proposed new rules and, if passed, will make it easier. But more importantly will better define the requirements to file, if any. It will also reduce the number of people who must file a bare trust return, starting in 2025.

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Bare trusts won’t have a filing obligation for 2024 if draft legislation goes through.

“The government is clarifying bare trust reporting rules to significantly reduce the number of Canadians with bare trusts who would have to file, and ease the related administrative burden when reporting requirements begin for the 2025 tax year”

– Shanna Taller, a spokesperson for the Department of Finance

The draft legislation effectively removes the filing requirement for this year and exempts more bare trusts from the expanded trust reporting rules. In explanatory notes published Aug. 15, Finance said the draft legislation “more clearly define[s] the beneficial ownership arrangements that are subject to the reporting rules” under a “deemed trust” subsection of the Income Tax Act that would take effect for trusts with year-ends in 2025.

The government also proposed broader trust reporting relief. Under the draft legislation, a trust — including a bare trust — will be exempted from a filing requirement when: all trustees and beneficiaries are related to each other; the fair market value (FMV) of the property doesn’t exceed $250,000; and the trust’s assets consist only of cash, GICs, mutual funds, personal-use property and securities traded on a designated exchange (as well as certain other assets). The draft legislation retains the existing filing exemption for trusts with a FMV of $50,000 or less, but no longer restricts the assets these trusts can hold to be eligible for the exemption. In addition, the trustees and beneficiaries need not be related to be eligible for the $50,000 exemption.

Both the $250,000 exemption and the $50,000 exemption would take effect for trusts with year-ends of Dec. 31, 2024, and later. If passed, the new $250,000 exemption will apply to many common bare trust situations, such as when an adult child is named joint owner of a parent’s bank account to help the parent manage their finances. While this will eliminate a lot of people from having to file, it will still leave a huge segment of taxpayers having to file a T3.

The proposed legislation also provides a filing exemption to an arrangement where individuals are on legal title of a real property that would be the principal residence of one or more legal owners, and all legal owners are related. The provision would be effective for trusts with year-ends of Dec. 31, 2025, and later. This will cover off a large percentage of the trust returns that were going to need to be filed. Even a seasoned tax advisor has to spend hours poring over these trust reporting rules to try and understand how they work.

The draft legislation is out for consultation until Sept. 11.

Trust reporting and bare trusts

Under common law, a bare trust exists when a trustee’s only duty is to transfer property to a beneficiary on demand. A bare trust could be used for income tax avoidance or evasion, but in most cases bare trusts are used for convenience, confidentiality, probate planning and other legitimate purposes.

Under previous legislation, generally only trusts with taxes payable for the year or those that disposed of capital property needed to file an annual trust income tax return (T3). Under the expanded reporting requirements, express trusts (as opposed to those created by law) as well as bare trusts must file a T3: Trust Income Tax and Information Return, and a Schedule 15: Beneficial Ownership Information of a Trust, with the CRA on an annual basis.

The rules require trusts to identify all beneficiaries, trustees, settlors and/or protectors of the trust, including their addresses, dates of birth and taxpayer identification numbers, such as social insurance numbers. Certain trusts are excluded from the expanded rules. These include graduated rate estates; qualified disability trusts; mutual fund trusts and registered plans; trusts in existence for less than three months; and trusts with less than $50,000 in asset value.

In addition to the existing penalty for failing to file a T3 return on time — $25 a day, with a minimum penalty of $100 to a maximum of $2,500 — the new reporting rules introduce an additional penalty for deliberately not filing or for gross negligence: $2,500 or 5% of the property’s value, whichever is greater.

What do I need to do?

It really depends on how much of this applies to you. The best thing you can do now is book an appointment with your accountant and start asking questions about this so they can be ready!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.