In a previous article (linked here), we discussed the introduction of the long-awaited new trust reporting rules, which will come into effect for trusts with taxation years ending on or after December 31, 2023.
Due to the change in reporting requirements, many trusts that were not required to file a trust return in previous years are now required to file a T3 Trust Income Tax and Information Return (“T3 return”) as well as a Schedule 15: Beneficial Ownership Information of a Trust (“Schedule 15”) by 90 days after its year-end of every year starting for the 2023 tax year.
Further, beginning with the December 31, 2023, year-end, the trustee of a bare trust must file an annual T3 trust return along with Schedule 15, which was not originally required. The wording of the new legislation, however, appears to capture a variety of other types of principal-agent relationships, meaning that many Canadian taxpayers may be unaware that they are a trustee of a “bare trust” for trust reporting purposes.
What types of arrangements create a T3 return requirement?
CRA guidance indicates:
For purposes of the requirement to file a T3 return, a trust includes an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property. These arrangements are generally known as “bare trusts”
In simpler terms, these rules will impact arrangements where one person (the trustee) is recorded as the legal owner of the property, but another person (the beneficiary) controls the trustee’s actions in respect of the property and enjoys the benefits / assumes any risk of owning the property. Here, the rights and responsibilities of the legal owner (trustee) in respect of the property are limited to merely holding the legal title to the property. The new rules extend beyond express bare trusts and may apply in situations where no bare trust was intended to be setup.
Keep in mind determining a bare trust relationship is a legal matter that must be confirmed with legal counsel based on your fact pattern. Some examples of arrangements that may be considered “bare trust” arrangements and exposed to the new T3 return reporting requirements include but are not limited to:
- A child’s name is added to a parent’s home;
- Parents include a child’s name on their bank/investment accounts (or other assets);
- Parents might be listed on a child’s home title;
- A parent or grandparent sets up a trust bank account for the benefit of a child or grandchild;
- Only one spouse’s name is on a house or asset deed, but the beneficial owner is the other spouse;
- Individual shareholders of a corporation open and hold a bank account on behalf of the corporation;
- A corporation owns property, vehicle, or other assets on behalf of an individual, and vice-versa;
- Assets are registered under one corporation but effectively belong to another related corporation;
- Using a legal title holder corporation for real estate where the legal title is separated from the beneficial ownership;
- A partner within a partnership is the only one listed on a bank account or asset, representing all partners within the partnership.
Per the Canada Revenue Agency, “it must be reasonable to consider that a trust acts as agent for all the beneficiaries under the trust with respect to all dealings with all the trust’s property. Therefore, in order to determine whether an arrangement is subject to these provisions, it must be determined if the arrangement is a trust or gives rise to the creation of a trust based on the applicable private law, or if the arrangement is otherwise deemed to be a trust for the purposes of the Income Tax Act. It should be noted that the question of whether a given arrangement is a trust or gives rise to the creation of a trust under the applicable private law is a question of fact and law.”
Additional Disclosure Requirements
The following information is required to be reported for all persons involved with the “bare trust” arrangement:
- Name
- Address
- Date of birth (if applicable)
- Country of residence
- Taxpayer identification number (i.e., SIN, business number, trust account number)
The requirement to report personal information extends to all persons involved in the arrangement, whether named in any legal capacity in respect of the agreement, or not. This means any individual, corporation, partnership, or trust with the ability to exert influence over the legal owner’s (trustee) decision-making will need to be disclosed on Schedule 15, on an annual basis. It will be important for “trustees” to have a complete understanding of all parties involved in the arrangement, in any capacity, prior to filing for the 2023 taxation year. The April 2, 2024, due date for the 2023 T3 return is quickly approaching, and it will be important to gather the required information as soon as possible.
Penalties
Failure to provide the newly required information will result in penalties of $25 per day of delinquency, with a minimum penalty of $100, and maximum penalty of $2,500. If the failure to file was made knowingly or due to gross negligence, an additional penalty of 5% of the maximum value of property held by the trust during the tax year may apply, with a minimum penalty of $2,500. It should be noted there is no maximum to the possible penalties for gross negligence in failing to report, creating significant risk for trustees who do not provide complete information.
Income Tax Treatment for “Bare Trusts”
It should be noted that the new reporting requirements only change the reporting obligation of “bare trusts” and not the tax treatment of “bare trusts”.
If you are the trustee of a bare trust, or if any of the above-noted scenarios apply to you or your family, you may be required to file a T3 return for the 2023 taxation year. Each person’s fact pattern must be carefully reviewed to determine the reporting obligations.
For more information or to find out whether you meet the reporting obligations, the team here at McGovern Hurley LLP is more than happy to help.
John Mendis, Tax Advisory and Compliance Partner, jmendis@mcgovernhurley.com
Greg Furyk, Business Advisory and Compliance Partner, gfuryk@mcgovernhurley.com
