In 2023, and during the 2023 trust filing season in early 2024, there was much discussion about bare trusts and the requirement to file both a
T3 Income Tax and Information Return (T3 return) and Schedule 15 Beneficial Ownership Information of a Trust for these arrangements. Non-compliance could result in significant penalties. The 2023 tax
year marked the first time that bare trusts had an income tax
reporting requirement.
The term bare trust is not defined in the Income Tax Act (the Act). However, it is generally considered to be an arrangement under which a trustee can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.
The CRA stated that a trustee can reasonably be considered to act as an agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property.
Due to the broad reach of this new requirement and the lack of clarity as to what arrangements constituted bare trusts, the CRA recognized that these new filing requirements may have had an unintended impact on taxpayers. On March 28, 2024, the CRA announced that they would not require bare trusts to file a T3 returns, including Schedule 15, for the 2023 tax year, unless the CRA made a direct request for these filings. In addition, they pledged to work with the Department of Finance to further clarify its guidance on this filing requirement.
The Department of Finance’s August 12th draft legislation
The Department of Finance released draft legislation on several matters on Aug. 12, 2024. One of the proposals was to suspend bare trust reporting for 2024 year-ends, and to provide more specific filing requirements for bare trust arrangements for 2025 and subsequent year-ends.
CRA’s update on trust reporting for the 2024 tax year
The Aug. 12, 2024, proposals have not yet become law. However, similar to the March 28, 2024 announcement, the CRA proactively announced on Oct. 28, 2024 that they will not require bare trusts to file a T3 return, including Schedule 15, for the 2024 tax year, unless the CRA makes a direct request for these filings.
Proposed changes for 2025
Starting in 2025, the wording in the Act is proposed to be changed such that certain arrangements will be considered to be “deemed trusts” and subject to the T3 and Schedule 15 reporting requirements.
A deemed trust will include any arrangement under which one or more persons have legal ownership of property that is held for the use of, or benefit of, one or more persons or partnerships, and
the legal owner can reasonably be considered to act as agent for the persons or partnerships who have the use of, or benefit of, the property. This provision will encompass what we commonly know as bare trusts.
However, the proposed changes list specific exceptions to arrangements that would otherwise be deemed trusts. Where an exception is met, no T3 or Schedule 15 filing will be required.
What are the exceptions?
The exceptions include the following common situations:
- Where property is held jointly, such as a joint bank account.
- Where a parent is on title to a property to allow a child to obtain a mortgage on the real property where the child resides.
- Where spouses jointly occupy a family home, but only one spouse is on title.
- Where a partner (other than a limited partner) holds property for the use or benefit of the partnership.
- Where property is held by a legal owner due to a court order.
- Where Canadian resource property is held for the use or benefit of one or more publicly listed companies or the subsidiaries or partnerships of such companies.
- Where a non-profit organization holds funds it has received from the federal or provincial government for the use or benefit of other non-profit organizations.
BDO can help
Bare trusts are commonly used in many types of personal and commercial arrangements and it can be difficult to stay on top of the legislative changes, but BDO can help you navigate the process.
If you have any questions, contact your local BDO advisor today.
The information in this publication is current as of Nov. 26, 2024.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.