Bare trusts are a commonly used legal arrangement wherein the trustee holds legal ownership of assets on behalf of beneficiaries without actively managing or retaining control over those assets. This type of trust is widely employed for various purposes, such as holding real estate, investments, or other valuable possessions within a family context.
The distinguishing characteristic of bare trusts lies in their passive nature, as the trustee's role is primarily administrative, involving the transfer of assets or income to the designated beneficiaries upon meeting specific conditions or milestones. Consequently, bare trusts are often viewed as mere conduits for asset ownership rather than active investment vehicles.
The Impetus for Change
In recent years, the Canadian government has intensified its efforts to enhance tax transparency and combat tax evasion and avoidance. As part of this initiative, the federal budget for 2018 introduced sweeping changes to the reporting requirements for trusts, including bare trusts, which were previously exempt from filing annual tax returns. These rules were enacted on December 15, 2022, and applied to the taxation years ending after December 30, 2023.
It mandated that all trusts, regardless of their type or purpose, file an annual T3 Trust Income Tax and Information Return, along with disclosing comprehensive details about trustees, beneficiaries, settlors, and other controlling individuals. However, the prospect of subjecting bare trusts to these extensive reporting obligations raised concerns. Critics argued that the administrative burden and costs associated with compliance would be disproportionate for these relatively straightforward trust arrangements, potentially discouraging their use and complicating routine family matters.
The Regulatory Pardon
Responding to these concerns, the CRA announced on March 28, 2024, that bare trusts would no longer be required to meet the new trust information reporting obligations for their 2023 tax year unless specifically requested to do so by the agency. This exemption applied only to the 2023 tax year, leaving the door open for future changes or revisions to the reporting requirements.
On August 12, 2024, the Ministry of Finance introduced draft legislation with a series of targeted amendments aimed at alleviating the reporting burden for various trust structures. Among the most notable changes is that bare trusts will not have a filing requirement for the 2024 taxation year. For the 2025 taxation year, the Ministry proposes a narrow definition of trusts that would have a filing requirement. Bare trusts would be included in this definition and would have a filing requirement for the 2025 taxation year but would be subject to exemptions. For example, the trust is excluded from filing requirements if any of the following conditions apply:
- Each legal owner is also a beneficiary;
- The legal owners of real property held in a trust are related individuals, and the real property could be designated as the principal residence of one or more of the legal owners for the year
- The legal owner is an individual, and the property held is real property that is used by the legal owner's spouse or common-law partner during the year and could be designated as the principal residence of the legal owner for the year;
- Each legal owner is a member of a partnership (other than a limited partner) holding property for the sole use by, or benefit of, the partnership, and any member of the partnership is required to file an information return for the partnership for the taxation year;
- The legal owner holds the property pursuant to an order of a court;
- The property is Canadian resource property that is held solely
for the use by, or benefit of, one or more persons or partnerships
that are:
- A publicly-traded corporation
- A corporation controlled by a publicly-traded corporation, or
- A partnership where the majority interest partner is a publicly-traded corporation or a corporation controlled by a publicly-traded corporation; or
- The property consists solely of funds received from the Crown, which is held exclusively for the use by, or benefit of, a tax-exempt person under subsection 149(1) of the Income Tax Act, and each legal owner is also such a tax-exempt person.
The draft legislation is currently open for consultation until September 11, 2024, allowing stakeholders to provide feedback and insights. While the proposed amendments aim to balance transparency and reduce administrative burdens, the complexity surrounding bare trusts and the determination of filing requirements remains challenging. Continued dialogue and collaboration between the government, tax professionals, and the trust industry will be crucial in refining these rules and ensuring a practical and effective implementation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.