I have previously written two articles on the federal government’s folly around new rules on bare trusts. In this third instalment, I bring the readers up to date on the federal government’s latest position on the bare trust tax filings.
Related stories:
- New rules bring reporting requirements for bare trusts
- Feds’ bare trust fiasco creates mess for many Canadians
By way of reminder, a bare trust is a trust relationship characterized by the following hallmarks:
The trustee (or legal owner) holds legal title to property to and for the benefit of the beneficial owner and has no other powers, duties or responsibilities in relation to the property.
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The beneficiary is the true owner of the property and retains the right to control and direct the trustee in all matters relating to the property.
Bare trusts are common in everyday life. For example, they include the following fairly typical arrangements:
An aging parent may add an adult child to title for real property, such as the family home or farmland, or bank/investment accounts in an effort to avoid probate and simplify the estate administration. In implementing this arrangement, the aging parent typically remains the sole beneficial owner of their property.
Child “in trust for” accounts, in which a parent has an “in trust for” account for a child and the property in the account is considered the child’s property (think, for example, of an account to hold the child’s birthday money).
Co-signor on a mortgage, in situations in which the beneficial owner cannot obtain financing and another person, such as a parent or grandparent, goes on title with the beneficial owner and co-signs the mortgage.
The above reflects just a small sub-set of arrangements that may constitute a bare trust.
Historically, bare trusts have been ignored for income tax purposes, and their existence was not generally reported to the Canada Revenue Agency.
However, starting with the taxation year ending Dec. 31, 2023, the federal government brought in new rules that require bare trusts to file an annual T3 trust tax return.
The first bare trust tax filings would have been due by the end of March 2024. However, at the last possible moment before the filing deadline, the federal government sheepishly admitted that it did not realize the impact these new rules were having on regular Canadians and announced that bare trusts did not need to file a tax return for that taxation year.
This, of course, was announced when many Canadians had already paid hundreds of dollars (if not thousands) for their accountants to file the bare trust tax return. And, of course, no one in our federal government has been held accountable for putting Canadians unnecessarily out of pocket.
The federal government left things loosely on the basis that further guidance would eventually be provided.
It has now done so, and — spoiler alert — much of the guidance garnered a massive eye roll from me and many others in the tax community. So, what has the federal government most recently come up with in this ongoing saga for bare trusts?
At a high level, bare trusts will need to file a T3 tax return, which is first applicable to taxation years that end on Dec. 31, 2025, meaning that the first annual filing is due by the end of March 2026, unless a new exception to the filing requirement applies.
The new guidance includes exceptions to the filing requirement:
Where all legal owners are also beneficial owners, no tax filing is required. Consider this an empty or meaningless exception, given that if all legal owners are also beneficial owners, then this isn’t even a bare trust.
Where the legal owners are related, and the property is one or more of the legal owners’ principal residence. This, for example, would exclude arrangements where a parent is on the title to a child’s principal residence to allow a child to obtain a mortgage. It would also exclude probate planning arrangements where an aging parent places a child on legal title to their principal residence to avoid probate. Notably, this exception only applies to a property that is a principal residence. It means farmers who place their farmland into joint tenancy for probate planning purposes are still stuck with the bare trust filing.
Where the fair market value of the trust property is $50,000 or less. This means all small trusts are exempt.
Where the legal owners and beneficial owners are all related, the fair market value of the trust is $250,000 or less, and the property of the trust consists of cash and certain financial investments, then it is exempt. This means aging parents who add their adult children to their bank or investment accounts are still stuck with the bare trust filing if their accounts exceed $250,000.
Where spouses jointly occupy a family home, but only one spouse is on legal title.
Where a partner (other than a limited partner) holds property for the use or benefit of the partnership.
This new guidance was open for feedback until Sept. 11, so who knows what else the federal government may come up with in relation to bare trusts.
Ironically, the government’s online news release on this matter slotted bare trusts under “Measures to Improve Tax Fairness.”
Was it tax fairness that Canadians had to spend their hard-earned money to file completely unnecessary trust tax returns for 2023? Was it tax fairness that tax advisers had to spend countless hours trying to learn and interpret vague rules and complete tax filings only to be told at the absolute last minute that none of that was necessary? Is it tax fairness that Canadians have to disclose bare trusts for the mere sake of disclosure, given that the bare trust, in and of itself and by its very nature of being a bare trust, has no income to report in any event?
I give the federal government a failing grade on this whole bare trust mess.
Jessi Brockman is a lawyer with Stevenson Hood Thornton Beaubier LLP in Saskatoon who can be contacted at jbrockman@shtb-law.com. This article is provided for general informational purposes only and does not constitute legal or other professional advice.
