In a significant shift in Canada’s trust taxation landscape, new reporting rules for bare trusts have been introduced under Bill C-32, effective December 15, 2022. If you’re involved with a bare trust, it’s crucial to understand these changes, as they impact your tax filing obligations from the 2023 tax year onwards. Non-compliance could lead to hefty penalties, including a new gross negligence penalty.
What is a Bare Trust?
A bare trust, or a simple trust, is a specific type of trust where the trustee’s role is limited. The trustee holds the legal title to the trust property but must act according to the beneficiaries’ instructions. The beneficiaries maintain beneficial ownership, meaning they have control over the trust property, while the trustee has no discretionary powers.
Uses of Bare Trusts
Bare trusts are popular for various purposes:
- Privacy: They help keep the true property owner anonymous, especially when ownership data, like land records, is public.
- Tax Minimization: They are instrumental in reducing land transfer taxes or probate fees during property transfers without altering legal titles.
- Corporate Reorganizations: Bare trusts facilitate the efficient transfer of property, avoiding multiple registrations of legal ownership.
- Gifting to Minors: They allow minors, who cannot hold legal titles, to own property.
- Joint Ventures and Partnerships: They hold legal titles on behalf of multiple owners.
Taxation of Bare Trusts in Canada
Traditionally, bare trusts were not a focus for Canadian income tax purposes. They allowed the transfer of legal title without triggering a taxable event, as long as the beneficial ownership remained unchanged. Tax obligations fell on the beneficiaries, not the trust. However, with the new legislation, this non-reporting stance has changed, even though the tax treatment itself remains the same.
New Reporting Requirements
Starting with the 2023 tax year, trustees of bare trusts must file an annual T3 trust return. This includes trusts with a calendar year-end as of December 31, 2023. Additionally, the new rules mandate detailed reporting of stakeholders involved in the trust. This information includes names, addresses, birth dates, tax residency, and tax numbers of trustees, beneficiaries, settlors, and any influential persons over the trust.
Deadline and Exemptions
The deadline for filing this trust return is 90 days after the tax year-end. There are exceptions, though. Bare trusts existing for less than three months or holding under $50,000 in specific assets (deposits, government debt, listed securities) are exempt from these new requirements.
Failure to file under these new regulations can be costly. The base penalty is $25 per day, with a minimum of $100 and a maximum of $2,500. A more severe penalty—$2,500 or 5% of the trust’s maximum property value during the tax year—applies in cases of gross negligence or intentional non-compliance.
The introduction of new reporting requirements for bare trusts in Canada marks a significant shift in how these entities are treated for tax purposes. It’s essential for trustees and beneficiaries to understand these changes and act accordingly to avoid penalties. Staying informed and compliant is key in navigating this new regulatory landscape.