The Government of Canada has introduced new reporting requirements for trusts, as part of its international commitment to the transparency of beneficial ownership information. The new reporting requirements apply to bare trust, Canadian resident trusts that are currently subject to exceptions and non-resident trust.
What is a bare trust?
A bare trust, also known as a simple or naked trust, is a specific type of trust where the trustee holds the legal title to the trust property, but the beneficiary has the beneficial ownership of the property. Here are some key points about bare trusts:
Trustee’s Role: The trustee has no obligation other than to deal with the trust property as instructed by the beneficiaries1. This means the beneficiary of a bare trust has complete control over the trustee’s action as it relates to the trust property and the trustee has no independent power, discretion, or responsibility over the property.
Uses: Bare trusts are commonly used to ensure privacy, minimize provincial land transfer taxes or probate fees, facilitate efficient property transfer in corporate reorganizations, gift a minor child or children with property who cannot hold a legal title, and hold legal title of a property on behalf of a group of owners in a joint venture or partnership.
Taxation: A bare trust is generally disregarded for Canadian income tax purposes. All income and capital gains from the bare trust are reported on the beneficiaries’ tax return(s) and the beneficiaries are taxed—not the trust. This tax treatment allows the legal title of a property to be transferred in certain situations without triggering a taxable event when the beneficiary retains beneficial ownership of the property.
For example, A property can be held in a bare trust where the children holds the legal title to the property, but the parents have the beneficial rights to the property.
Here are the key points for bare trust reporting:
Effective date: The new rules apply to tax years ending after December 30, 2023.Many trusts, including bare trusts, will need to file for the first time.
What to file: Affected trusts will be required to file a T3 Trust income tax and information return (T3 return) and a Schedule 15 (Beneficial Ownership Information of a Trust) with the Canada Revenue Agency (CRA) every year.
Information required: An affected trust must provide additional information for all reportable entities such as trustees, settlors, beneficiaries, and controlling persons for the trust.
Exemptions: Some trusts are exempt from the new reporting requirements, like registered plans, qualified disability trusts, mutual fund trust and asset fair market value less than $50,000 throughout the year.
Deadline: The deadline for the T3 return and Schedule 15 is 90 days after the trust’s tax year end1. Trusts with a December 31, 2023 tax year end will need to file their T3 Return and Schedule 15 by March 30, 2024.
Please note that failure to comply with the new reporting rules may result in potentially significant penalties. The failure to file penalty will be greater of
- $2,500; and
- 5% of the highest total fair market value of all the property held by the trust.
For more detailed information, you can refer to the Canada Revenue Agency publish. If you’re unsure about any aspect, it’s always a good idea to consult with a tax professional.