HSS Blog – New Bare Trust Rules
On November 3, 2022, the Federal government’s 2022 Fall Economic Statement confirmed that recently enacted income tax compliance rules for trusts will take effect for taxation years ending on or after December 30, 2023. The new rules impact bare trusts, which are commonly used by real estate owners to hold title of their properties.
What is a Bare Trust?
A bare trust exists where a trustee, typically an inactive corporation with no assets, is vested with legal title to a property but has no other duty or obligation with respect to the property other than to transfer its legal title as per instructions provided by the beneficiary(ies). Should the trustee be empowered with independent or discretionary powers, duties or responsibilities, the trust will not be a bare trust.
Therefore, although not required, we recommend having a written trust instrument detailing the trust’s terms. In addition, the settlor(s), beneficial owner(s) of the trust and the shareholder(s) of the bare trustee should be the same.
Bare trusts are often used for privacy purposes, or to maintain anonymity, where ownership information of a property is public record, such as in a land registry.
What are the New Compliance Rules?
First, prior to the new legislation, a bare trust did not have to file a T3 trust return. Under the new rules, a bare trust must now file an annual T3 for years ending after December 30, 2023. Since a bare trust is deemed to have a December 31st year-end, all bare trusts will have to file for the 2023 year.
Second, there are enhanced disclosure requirements for the settlor(s)/beneficiary(ies) and the trustee. The T3 must disclose the following for each settlor/beneficiary and trustee:
- Date of birth (for individuals);
- Jurisdiction or residence; and
- CRA identification number (SIN, business number, etc.).
In addition, a beneficial ownership schedule will need to be completed as part of the filing.
There is a meager filing exemption for bare trusts in existence for less than three months.
What are the Penalties for Non-Compliance?
The legislation includes a late filing, or failure to file, a T3 return. Bare trusts are subject to a penalty equal to the lesser of $25/day unfiled, with a minimum penalty of $100 and a maximum of $2,500.
If the failure to file the return was made knowingly or due to gross negligence, an additional penalty equal to 5% of the maximum fair market value of property held during the relevant year by the trust will apply, with a minimum penalty of $2,500.
Originally, the new legislation was to take effect for years ending after December 30, 2022 but a year reprieve was provided. Another extension will not be coming, and we recommend gathering your information as soon as possible to avoid penalties. The professionals at Hogg, Shain & Scheck are here to help if you have any questions or concerns about potential T3 filings resulting from the new rules.