Trust Reporting and Bare Trusts
Do you have joint accounts or hold real estate jointly with your children for estate planning purposes? If so, you might need to file a bare trust and a trust tax return.
What is a bare trust?
A bare trust is an arrangement where an individual or entity holds title to an asset (as trustee) for another person (a beneficiary) but the trustee has no significant power or responsibilities. The trustee must take instructions from the beneficiaries and typically the trustee’s only function is to hold title to an asset.
What are some examples of a bare trust arrangement?
- An adult child is added to a joint bank account or joint investment account with parent often for ease of estate administration on the parent’s passing. The intention is that the parent is still entitled to 100% of the account during their lifetime and will continue to report 100% of the income from the account during their lifetime.
- An individual is registered on the title of real estate that they do not beneficially own. For example, a parent might add their adult child to the title of their home or cottage for estate planning purposes, but the intention is that the parent continues to beneficially own 100% of the property during their lifetime.
- A corporation holds title to assets (e.g. an investment account or real estate) for the benefit of someone else (e.g. an individual). This is often done for probate planning purposes and the individual still reports 100% of the income from the assets on their personal return.
If a bare trust exists, when is a trust tax return due?
A T3 trust income tax return needs to be filed 90 days after December 31 or March 30, 2024 for the 2023 taxation year.
2023 Bare Trust Filing Exemption: On March 28, 2024, the Canada Revenue Agency (CRA) announced that Bare trusts are exempt from trust reporting requirements for 2023 as they recognize the challenge in identifying bare trusts that previously were never required to file a return. This relief only applies to the 2023 taxation year.
Bare trusts are exempt from trust reporting requirements for the 2023 taxation year only.
The return won’t report any income (as the beneficial owner continues to report any income earned) or assets held but it will need to disclosure personal information about the trustee, beneficiaries, and settlor. See this article for more detail on enhanced trust reporting requirements starting with the 2023 tax year.
What is the penalty for failing to file a trust return?
The penalty is the greater of:
- $2,500
- 5% of the highest total fair market value of all property held by the trust in the year
Do I need to let my accountant know if I think I have a bare trust?
Yes, an accountant will often have no way of knowing that an individual has a bare trust especially if no income is reported on the asset. For example, an accountant would have no way of knowing that a parent added their children to real estate (e.g., for estate planning purposes) or joint bank accounts. Please let your accountant know of any assets held jointly with someone where the person(s) on title are different than the beneficial owner(s).
Are there any exceptions?
There are limited exceptions to the requirement to file, the most common exceptions that will be applicable to a bare trust include:
- The trust holds assets (that can only include money, term deposit, government debt obligations, and listed securities) with a combined maximum fair value that was below $50,000 at all times in the year; and
- Trusts that have been in existence for less than three months
Video
Watch a video featuring Stern Cohen Tax Partner Adam Morke, CPA, CA, TEP. Please note that this interview was recorded before March 28, 2024 when the CRA announced a bare trust filing exemption for the 2023 tax year.
Disclaimer: This article is intended to inform readers in general terms. It is not intended to provide any tax or business advice. Please consult your Stern Cohen advisor if you have any questions about your unique situation. While we have tried to ensure the accuracy of the information in this article, we accept no liability for errors or omissions.
