Bare Trusts – Demystifying T3 Filing Requirements
In recent years, Canada has introduced sweeping changes to trust reporting obligations, significantly affecting various trust structures—including bare trusts. These changes aim to increase transparency and align Canadian rules with international standards. This article explains what bare trusts are, how they are taxed, recent reporting requirements, proposed legislative changes, and key terms you should know.
What Is a Bare Trust?
A bare trust is a simple type of trust where the trustee acts as an agent for the beneficiaries. This means:
- The trustee holds the title to the property on paper but does not have any decision-making power.
- The beneficiaries have full control over the property and direct all actions, such as selling or transferring it.
- The trustee must follow the beneficiaries’ instructions and cannot act independently.
Common Uses of Bare Trusts
Bare trusts are popular because they offer flexibility and privacy. They are commonly used to:
- Maintain privacy: The trustee’s name appears on public records, not the beneficiaries’.
- Estate planning: Help reduce provincial land transfer taxes or probate fees when transferring beneficial ownership.
- Corporate or partnership structures: Hold property during reorganizations or for joint ventures.
- Family arrangements: Hold family homes or assets for related persons.
Recent Developments: Proposed Legislation
The Minister of Finance introduced draft amendments that would change the treatment of some bare trusts by reclassifying them as “deemed trusts.” This would make them subject to mandatory T3 filing and Schedule 15 reporting.
A deemed trust is a trust that the law treats as a regular trust for reporting purposes, even if it was previously considered a bare trust. This means these trusts would have to file tax returns and disclose detailed information about all connected individuals.
Schedule 15, which focuses on beneficial ownership disclosure, requires detailed information about individuals connected to the trust. The disclosure applies to all trustees, beneficiaries, settlors, and any individuals who hold authority—either through the trust deed or a related agreement—to influence or override trustee decisions regarding the distribution of income or capital. The goal is to improve transparency and align Canada’s standards with international norms.
The draft legislation outlines several exemptions from the T3 filing requirement. These include:
- Joint ownership arrangements, such as joint bank accounts.
- Real property held for a related person, where the property qualifies as the individual’s principal residence.
- Low-value trusts, where the total fair market value of assets does not exceed $250,000 and consists only of specified categories like cash, publicly traded securities, or personal-use property.
It is important to note that these amendments and exemptions remain proposals. The Minister of Finance continues to consult with stakeholders, and further legislative steps are expected before any new rules take effect.
Penalties for Non-Compliance
Although bare trusts were exempt from filing requirements for 2024, trustees must remain vigilant. Under current rules, failing to file a required T3 return can result in penalties of $25 per day, up to a maximum of $2,500. In cases involving gross negligence or false statements, penalties can escalate to 5% of the highest fair market value of the trust’s assets during the year, with a minimum penalty of $2,500.
These penalties highlight the importance of understanding and complying with trust reporting obligations—even when exemptions apply.
Conclusion
As Canada’s trust reporting landscape continues to evolve, individuals involved in bare trust arrangements must stay informed, maintain accurate records, and prepare for potential changes in 2025.
If you find yourself confused or uncertain about your obligations under the Income Tax Act, are facing an audit, or have received penalty as they relate to T3 filings/registration, it is crucial to seek professional assistance.
Scheduling a consult with our experienced team at Rosen & Associates Tax Law can help you understand the finer points of the Income Tax Act’s application to Trusts and help guide any disputes with the CRA to the best possible outcome.
***Disclaimer: This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.
Bhavika Chadha