Awhile back, I wrote an article on bare trusts and the changes to tax filing obligations for bare trusts. By way of reminder, a bare trust is a trust relationship characterized by the following hallmarks:
- the trustee holds legal title to property and has no other powers, duties or responsibilities in relation to the trust property; and
- the settlor is the sole beneficiary of the bare trust and retains the right to control and direct the trustee in all matters relating to the trust property.
Bare trusts are common in everyday life. For example, bare trusts include the following fairly typical arrangements:
- estate planning with aging parents: an adult child may be added to title for real property (e.g. family home, farmland) or bank/investment accounts owned by the aging parent 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 assets and their adult child was only added to legal or registered title;
- child “in trust for” accounts: where 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, an account to hold the child’s birthday money); or
- co-signor on a mortgage: where the beneficial owner cannot obtain financing, another person (e.g. 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.
New Reporting Rules for Trusts, including Bare Trusts
Historically, bare trusts have been ignored for income tax purposes and their existence was not generally reported to the Canada Revenue Agency. Back in 2018, the federal government signaled upcoming changes to the Income Tax Act (Canada) to expand the trust reporting regime for all “express trusts”, unless specifically excepted. In 2022, the federal government signaled that bare trusts would also be looped into and subject to the new trust reporting rules starting with the 2023 calendar year and on (presumably to sniff out criminal activities such as money laundering or terrorist financing – whether a criminal will complete their T3 bare trust filing is a whole other story!). Since 2022, tax professionals across Canada have been simultaneously:
- trying to reason with and/or scold the federal government that these new bare trust rules are so overly broad that they are capturing a vast number of common bare trust arrangements for many Canadians, with it being entirely unclear why the government cares to be informed of these fairly mundane bare trust arrangements; and
- scrambling to notify our clients of these new tax rules and determining which clients have bare trust arrangements in order to help get clients into compliance with the new bare trust filing obligations, with the first bare trust filing being due at the end of March, 2024 (extended to April 2, 2024 due to the timing of Easter weekend). Missing the filing deadline would have meant many Canadians could face some steep penalties (although the CRA had somewhat previously walked back on the penalties).
On the Thursday afternoon (March 28, 2024) heading into Easter long weekend and really at the last possible moment before the filing deadline, the federal government did a complete about face on the bare trust filing rules, with the CRA publishing that:
“[i]n recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians, the Canada Revenue Agency (CRA) will not require bare trusts to file a T3 … for the 2023 tax year, unless the CRA makes a direct request for these filings. Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement.”
“Unintended impact on Canadians”? Is the government seriously suggesting it did not understand the impact of these rules when tax professionals have been shouting about this since 2022? Did the government not bother to consider all the common arrangements that constitute a bare trust when they introduced these over-reaching rules?
And the last-minute timing of this announcement? Many Canadians have already paid hundreds of dollars (if not thousands) for their accountants to file the bare trust tax return in advance of the filing deadline. In other words, our government put many Canadians out of pocket for something that was a “whoops, my bad” on the government’s part. Is anyone in government going to be held accountable for this? Similarly, many tax professionals have spent hours and hours researching the new rules, educating our clients on these new rules, and helping clients with the T3 filing – all for nothing. Is anyone in government going to be held accountable for this?
Where do things stand for 2024 and on?
Your guess is as good as mine. In light of the complete disaster the government created in the first instance with these bare trust rules, I do not place much confidence in them to fix their mess in a way that makes practical sense for Canadians. In the meantime, stay tuned.
Jessica Brockman
STEVENSON HOOD THORNTON BEAUBIER LLP
500-123 2nd Avenue S, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: jbrockman@shtb-law.com
The information in this article is not legal advice. We encourage you to consult with your legal advisor for advice specific to you.
This article was originally published in The Western Producer on April 26, 2024