Last week, many Canadians were scrambling alongside their accountants to file T3 Income Tax and Information Return for the 2023 tax year ahead of the April 2 deadline. A T3 filing was required for anyone with a bare trust.
And then last Thursday—right before a holiday long weekend with the filing deadline set for this past Tuesday—the Canada Revenue Agency (CRA) announced that it would not require bare trusts to file 2023 T3s after all, unless specifically requested.
The news came too late for many accountants and law-abiding Canadians who hired them to help prepare the T3s. The last-minute decision to cancel the reporting requirements left many scratching their heads. Some even say the decision undermined trust in government.
A bare trust is when the title of the trust property is held by the trustee, but the beneficiary has the ownership. That means the trustee has no independent power or responsibility over the property.
Bare trusts can be used in cottage estate planning to avoid a 1.5 per cent probate tax on the fair market value of a property when someone passes away, for example, or a bare trust arrangement could be as simple as naming a spouse or child on a bank account.
Previously, it was unclear which arrangements were considered a bare trust under the reporting requirements. The new rules were first proposed in the 2018 federal budget and came into effect for the 2021 taxation year. But they were delayed twice, and the 2023 tax year was the first time the new reporting requirements were law.
“The number of phone calls that I got from clients in the month of March,” says Armando Minicucci, a tax partner with Grant Thornton. “Everyone was scrambling to find out, ‘Oh, my goodness, I’ve got all these bank accounts that have my son or my daughter on them. Do I need to file a separate trust return for each one of these?’”
Why do people use bare trusts?
“We see it a lot in estate planning—bare trusts are put in place as a tool,” says Minicucci. “For example, my mother is a widower and she owns a house,” Minicucci says. “Her lawyer, for estate planning purposes, decided to add me to the title. So when you see the property tax bill, you see my mother’s name and you see my name—that’s a bare trust.”
“You’d see the same thing happening with bank accounts, investment accounts. Those are all bare trust arrangements,” he says. “The key thing with a bare trust arrangement is that when the asset goes into the trust, there’s no change in ownership.”
Cottagers should be aware of these new reporting requirements for the coming years. “It’s not uncommon to have the cottage sitting in a trust,” Minicucci says. “That trust likely never had to file a trust return in the past because it doesn’t generate any income and it doesn’t distribute capital to anybody.”
Minicucci says any cottages held in bare trusts need to file a return every year, regardless of whether there’s been any activity.
“Under our previous rules, that trust would only have to file in the year in which the cottage was sold or the trust got wrapped up and they distributed the cottage out,” he says.
Why is this change being made?
Back in 2018, Minicucci says the CRA started creating new transparency rules, first for corporations. The goal was to make entities disclose beneficial owners, including name, birth date, latest address, and the jurisdiction of residency of the tax reporting, among other details.
“We are trying to get to a point where people cannot use a Canadian entity, whether it’s a corporation or a trust, to hide behind it,” Minicucci says. “Our rules are now coming in line with what we have in some of the other jurisdictions around the world, where someone should be able to identify who’s behind this company.”
These rules are far-reaching and could affect hundreds of thousands of Canadians. Minicucci says part of the commotion was due to the very broad definition of “bare trusts” as outlined in the Department of Finance’s legislation.
“The definition is so broad that essentially any arrangement where somebody was holding something for somebody else, and didn’t have beneficial ownership—is a bare trust,” Minicucci explains.
“There’s still the uncertainty,” he says. “We’d like to see some clarity from Finance. What information do they really want, specifically with these bare trust arrangements?”
That information remains unclear. “Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement,” the CRA website says. “The CRA will communicate with Canadians as further information becomes available.”
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