You May Have a Trust and Not Even Know It

Update: On March 28, 2024, the Canada Revenue Agency (CRA) announced that it is exempting bare trusts from having to file a T3 return for the 2023 tax year, unless the CRA makes a direct request for these filings. The CRA will work with the Department of Finance to further clarify its guidance on the filing requirement.

However, the new rules apply to bare trusts that may well exist without a lawyer’s touch. Many people may be acting as trustees for family members and not even realise that they have a trust, given the broad definitions being used. For instance, adult children are often added as a joint holder to a parent’s bank account for estate planning purposes. This is viewed as a bare trust and the account holders will now be required to file a tax return. The application of the new reporting rules to bare trusts is significant as these types of trusts are common and used by Canadians for both personal and business purposes.

Under the Income Tax Act, a bare trust is a relationship where a trustee “can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with trust property”. Another way to think about a bare trust is to differentiate between the legal ownership and beneficial ownership of an asset/account.  The legal owner is on title of the asset or named on the account whereas the beneficial owner of an asset/account enjoys all the benefits and pays the costs of the asset/account. Bare trusts may or may not be documented in writing.

Examples of bare trusts may include:

• In Trust For accounts for your child or grandchild. You hold legal ownership of the account and assets (the trustee), but your child or grandchild is the beneficial owner (the beneficiary).
• Joint accounts with an adult child for ease of financial administration and/or estate planning. The adult child is a legal owner (the trustee) but the parent remains the beneficial owner (the beneficiary).
• A parent listed as an owner of a house or condo for mortgage qualification purposes. The parent is the legal owner (the trustee) but your child is the beneficial owner (the beneficiary).

One positive to the new bare trust requirements is there should not be any tax owing by the trust because the beneficial owner reports any taxable income; Essentially these regulations are focused on reporting additional information.

But people who have previously filed trust returns aren’t getting off free and clear either. Even if you have been filing trust returns in the past, you will now be asked for more disclosure about the existing trustees and beneficiaries.  In effect, this is all an information-gathering exercise for the CRA in an attempt to reduce tax evasion.

Certain trusts are exempt from these new reporting requirements.  These include:

• Trusts that have been in existence for less than three months at the end of the year
• Trusts that have held less than $50,000 market value throughout the year and the assets are comprised of cash and/or marketable securities
• Estates (an estate is a trust)

The deadline for these tax returns is 90 days after the trust’s year end.  Most trusts have a December 31 year end, therefore this year, trust tax returns are due on April 2, 2024. Late fees of $25/day with a minimum of $100 and a maximum of $2,500 are listed in the law but the CRA has said they will not enforce these penalties on bare trusts this year. Fines may apply if you knowingly fail to file a trust return or make a false statement.

The rules are new and there is not a lot of guidance currently available from the CRA. The key “take away” is that we encourage our clients to seek advice from a tax professional to ensure compliance.

If you do find yourself in the position of having to file a bare trust return, here are a few tips:

1. You need a trust account number to file a trust return (T3 return) electronically so unless you were ahead of the game and applied for one, you will have to paper file the first return.
2. The legal owner is the trustee. If there is more than one trustee, only enter the information for the trustee who will be the primary contact for the CRA on the main part of the return.
3. The beneficial owner is the beneficiary.
4. The beneficiary is also the settlor of the trust.
5. The name of the trust for tax reporting purposes should be the name of the beneficiary followed by the word “Trust” – i.e. “Jane Doe Trust”.
6. Most of the information on the T3 return is likely not relevant for bare trusts.
7. The most important part of the new filing is Schedule 15 – Beneficial Ownership Information of a Trust. Here you need to fill out as many forms as there are “reportable entities”. Reportable entities include the settlor, the trustee(s) and all beneficiaries.
8. All income from the trust property for a tax year should be reported on the beneficial owner’s tax return so the taxable income in the trust return should be $0.