For tax years ending on or after December 31, 2023, most bare trusts will be required to file a T3 trust income tax return, regardless of the absence of any income to report, and may also be required to disclose information about the beneficiaries of the bare trust (referred to as a Schedule 15 disclosure).
A "bare trust" is not technically a legal term but is a commonly used phrase to describe a form of trust relationship where the trustee merely holds legal title to property on behalf of one or more beneficiaries but has no discretion over such assets and must follow the instructions of the beneficial owners of the property. Bare trusts can exist without a written trust indenture. A principal-agent relationship, without reference to any particular property, would typically not constitute a bare trust.
Previously, bare trusts were exempt from filing trust tax returns because any income, profits or gain from the property held in the bare trust are not earned by and do not belong to the trust. This new reporting requirement was enacted by the federal Government to "counter aggressive tax avoidance as well as tax evasion, money laundering and other criminal activities."
Unfortunately, the legislative net was cast considerably wider than expected with likely dubious success in achieving such objectives. These new rules now represent an added layer of tax compliance for many common commercial arrangements. For example, it is commonplace to have a bare trust where a separate nominee holds registered (i.e., legal) title to real property on behalf of, and at the complete direction of, the beneficial owner(s) of the real property. This is a particularly common structure in the real estate and resource industries.
Any exclusions to the filing obligations for bare trusts are limited and fairly specific to particular circumstances (such as a lawyer's trust account), with the main one of general application being for a trust that holds property falling below a de minimus threshold of $50,000.
As a practical matter, for trustees or nominee persons holding legal title to property under a bare trust (subject to checking for specific exclusions):
- The bare trust will generally be deemed to have a December 31 year end;
- The first T3 tax return for an existing bare trust will be due on April 2, 2024; and
- If the person also has the control of or receives income, gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity in respect of the property, a Schedule 15 disclosure must also be prepared with detailed information on the beneficial owner(s) of the property.
Given the legislative and procedural uncertainties for first time bare trust filers (which we would say includes the actual legal interpretation of the scope of the rules), the Government has indicated that it will (generally) not impose late filing penalties for this first round of filing. There is an education process that is unfolding as well as time needed to identify the presence and scope of any bare trust (where there may be hundreds or thousands for a particular business). We recommend, however, that trustees or nominees not unduly delay the filing of the trust tax returns as a failure to file may be subject to a penalty of up to 5% of the trust property's value.
Additional administrative guidance from the Government is also available at New trust reporting requirements for T3 returns filed for tax years ending after December 30, 2023 - Canada.ca. We expect that this website will continue to be updated over the first quarter of 2024 as the Government establishes further guidelines.
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.