On February 4, 2022, the Canadian federal government released draft legislation to implement a number of tax measures one of which is an amendment to the new reporting for Canadian resident trusts (first announced in the 2018 Federal Budget). The new reporting for a Canadian resident trust is that they must file a T3 Trust Income Tax and Information Return each year, unless the trust is subject to one of the exceptions provided in the legislation. The February 4, 2022 draft legislation expands on the 2018 announcement to include an arrangement where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all of the trust’s property. These arrangements are generally known as “bare trusts”.
A bare trust is generally a relationship between a trustee and a beneficiary with the following characteristics:
• The trustee has no significant powers or responsibilities and cannot take action without instructions from the settlor regarding any aspect of the trust;
• The trustee’s only function is to hold legal title to the property; and
• The settlor (or settlors) is the sole beneficiary and can cause the property to revert to them at any time.
Bare trusts are used in a number of contexts, including:
• Minimizing property transfer taxes and fees in real estate transactions where there is a change in the beneficial owner but no change to the nominee holding legal title;
• Holding securities and funds in trust;
• Administering joint ventures and partnerships where a nominee holds legal title to a property on behalf of a group of owners;
• Facilitating corporate reorganizations where the legal ownership of property may otherwise need to be transferred and registered;
• Enabling the immediate transfer of beneficial ownership between parties where legal or regulatory impediments prevent a contemporaneous transfer of legal title; and
• Estate planning, to minimize the fees, costs and time associated with probate.
Bare trust relationships have generally been ignored for income tax purposes and their existence is generally not reported to the CRA. All of the income, gains and losses with respect to the trust property are attributed and reported for income tax purposes by the settlor/beneficial owner. The proposed amendments deal only with reporting obligations and will not change the income tax treatment of any bare trust.
The new reporting requires most Canadian resident express trusts and bare trusts to file a T3 Return, commencing in their first taxation year ending after December 30, 2023. Assuming the February 4, 2022 proposed amendments receive Royal Assent later this year, a bare trust would be required to file a T3 Return by March 31, 2024.