Bare Trusts and Bare Trust Exemptions
Background
Do you have a bare trust? If so, do you have a filing obligation? These are not easy questions to answer. Trust reporting requirements have been expanded starting with tax years ending on December 31, 2023, and these additional requirements apply to bare trusts as well.
The expanded rules require bare trusts to file annual T3 returns. CRA did provide relief from filing 2023 T3 returns to bare trusts on March 28, 2024.
Bare Trusts – Brief Description*
A bare trust is a specific type of trust in which a trustee’s only obligation is to deal with the trust property as instructed by beneficiaries. The trustee holds legal title of trust property, while the beneficiaries have beneficial ownership of property. A bare trust is an example of principal-agent relationship according to which a beneficiary of a bare trust has complete control over trustee’s actions related to trust property.
Note that the income tax treatment of bare trusts has not changed. All capital gains and income from the bare trust are reported on the beneficiaries’ tax returns. As such, the beneficiaries are taxed and not the trust.
Examples of common bare trusts
There are many arrangements that may be considered bare trusts. Here are a few examples of common ones:
- Spouses jointly occupy a family dwelling that could be designated as a principal residence, but only one spouse is on legal title.
- Spouses have a joint bank account for the use and benefit of both spouses.
- A parent is on legal title of a principal residence to allow a child to secure a mortgage.
August 12, 2024 Draft Legislation
Department of Finance (“Finance”) released the latest proposals related to trust reporting requirements on August 12, 2024. Finance has proposed that bare trusts will not be required to file T3 returns for December 31, 2024 tax year either. Furthermore, Finance has proposed that specific types of bare trusts be permanently exempt from reporting obligations.
Beginning with the year ending December 31, 2025, a bare trust would not be required to file a T3 return according to the August 12, 2024 proposals provided during the year:
- All legal owners are beneficiaries of the bare trust, and all beneficiaries are legal owners of the trust property.
- Example: Husband and wife own a joint bank account, of which they are beneficiaries.
- Example: Husband and wife own a joint bank account, of which they are beneficiaries.
- The property is real property that could be designated a principal residence of at least one of the owners and the legal owners are all related individuals.
- Example: Father, mother, son and daughter are legal owners of the family home, which is considered a principal residence for the father and mother.
- Example: Father, mother, son and daughter are legal owners of the family home, which is considered a principal residence for the father and mother.
- The property is a real property held for the use or benefit of the legal owner’s spouse or common-law partner, and the property could be designated as the owner’s principal residence.
- Example: A condominium is held for the use of the legal owner’s spouse and could be designated as the owner’s principal residence.
- Example: A condominium is held for the use of the legal owner’s spouse and could be designated as the owner’s principal residence.
- The legal owner holds the property pursuant to a court order.
- Example: A couple is going through a divorce and own a home together. As part of the divorce proceedings, the court may issue an order that transfers ownership of the property to one spouse while stipulating that the other spouse retains a financial interest or equity in the home. As such, the spouse who receives the property would be the legal owner and he/she may have an obligation to pay out the other spouse’s share at a later date.
- Example: A couple is going through a divorce and own a home together. As part of the divorce proceedings, the court may issue an order that transfers ownership of the property to one spouse while stipulating that the other spouse retains a financial interest or equity in the home. As such, the spouse who receives the property would be the legal owner and he/she may have an obligation to pay out the other spouse’s share at a later date.
- Canadian resource property is held exclusively for the use or benefit of one or more publicly listed companies (or in some cases, subsidiaries or partnerships of such companies).
- Example: A resource company such as Barrick Gold Corporation may hold exclusive rights to mine a gold deposit in Northern Ontario.
- Example: A resource company such as Barrick Gold Corporation may hold exclusive rights to mine a gold deposit in Northern Ontario.
- Each legal owner is a partner (other than a limited partner) holding the property exclusively for the use or benefit of the partnership, and at least one partner is required to file an information return for the partnership (T5013).
- Example: Partners, A, B, and C (each a general partner with equal ownership stakes) have formed ABC Realty Partners to invest in and manage real estate properties. ABC Realty Partners holds a multi-unit residential building located in Toronto exclusively for the benefit of the partnership (i.e., to generate rental income and eventually sell the building for a profit). One of the partners, for example, Partner A, is designated to file the T5013.
- Example: Partners, A, B, and C (each a general partner with equal ownership stakes) have formed ABC Realty Partners to invest in and manage real estate properties. ABC Realty Partners holds a multi-unit residential building located in Toronto exclusively for the benefit of the partnership (i.e., to generate rental income and eventually sell the building for a profit). One of the partners, for example, Partner A, is designated to file the T5013.
T3 Schedule 15 - Additional proposed exemptions
Beginning with December 31, 2024 tax years, Finance proposes to expand the list of exemptions from the requirement to file T3 Schedule 15, some of which are applicable to bare trusts. More specifically the following two exemptions are proposed:
- Trusts that satisfy all the following conditions:
- All beneficiaries and trustees are individuals
- Each trustee is related to each beneficiary, and
- The total Fair Market Value (FMV) of the trust property is $250,000 or less throughout the tax year, on condition that the trust’s holdings are limited to certain types of assets such as: deposits, guaranteed investments certificates (“GICs”) issued by Canadian banks, debt obligations issued by a publicly listed entity or the government, personal use property and listed securities.
- All beneficiaries and trustees are individuals
- Trusts with assets that have a total FMV of $50,000 or less throughout the tax year (without restrictions on asset type). As such, the current $50,000 exemption that limits the types of assets that can be held to qualify would be replaced.
Penalties
If you fail to file a T3 return by the filing due date, the penalty is $25 / day (minimum $100 and maximum $2,500). If it is determined that failure to file was intentional or due to gross negligence, then an additional penalty equal to the greater of $2,500 or 5% of the maximum value of the property held during the tax year may apply.
Summary
Navigating the bare trust rules and exemptions is not easy. That is why legal and strategic advice is important. Whether you currently have bare trusts or in the future may enter into arrangements that may be considered bare trusts our experts can guide you. Please reach out to our team for a consultation.
* Note that terms such as Settlor, Trustees, Beneficiaries and Trust Property are defined in our article Workings of a trust in Canada (prasadcpa.com).
