March 28, 2024: “In 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 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request for these filings”[1].
The Canada Revenue Agency (“CRA”) issued new rules earlier this year, expanding the reporting requirements for trusts with taxation years ending on or after December 31, 2023.These reporting rules, aimed at enhancing transparency and combating tax evasion, meant new obligations and challenges for trustees and beneficiaries alike.
While only certain trusts were required to file a T3 return under the previous regulations, the new rules mandated that all trusts which are resident in Canada would be required to file an annual T3 return, regardless of whether they generate income or not unless they are a “Listed Trust” as defined in the legislation.[2] In addition to the expanded reporting requirements, these new rules introduced enhanced disclosure obligations for trusts. In addition to filing the T3, trustees would also be required to provide detailed information about the trust's current and contingent beneficiaries, trustees and settlers, including their identities, addresses, and tax identification numbers (or SIN). The penalties for failing to abide by the new rules are set out here at page 23.
Given the significant confusion among tax advisors and clients that this initial CRA reporting requirement presented, we can hope that the republished reporting requirements will provide greater clarity on the ownership arrangements requiring annual tax filings; however in the meantime, this reporting reprieve allows time to scrutinize our asset ownership structures – always a central consideration in estate planning!
Impact of Bare Trusts on Estate Planning
In a bare trust, the trustee holds assets on behalf of the beneficiary, with minimal involvement in decision-making or control over the assets. Bare trusts include the common scenarios where an asset, such as a house or financial account is owned in trust with an adult child, and is therefore now subject to the new rules. Joint bank accounts, jointly-held real property and “in-trust-for” accounts are common bare trust strategies used for estate and incapacity planning and these arrangements may be subject to the new reporting rules in 2024[3]. There is confusion as to whether real estate in which a life interest is granted to an individual with the remainder interest passing to another individual on the life tenant’s death. Some advisors see this arrangement as simply a way to hold legal tenure while others see this arrangement as a bare trust subject to the filing requirements.
Any of these trusts may be subject to CRA scrutiny to ensure that any income or assets associated with the life estate or trust are properly accounted for in tax filings. Trustees and their advisors need to review existing trust structures (including any jointly held property) and assess their compliance with the new regulations. Additionally, individuals considering setting up new trusts must carefully consider the implications of the reporting requirements, in addition to the estate planning consequences.
Considerations For Estate Lawyers
Lawyers should educate their clients about the potential reporting requirements and ensure that clients understand their obligations regarding trust reporting and the penalties associated with failing to comply. Revised planning may be necessary as the administrative burden and information disclosure of the bare trust may now outweigh the original benefits of the arrangement.
Advising existing clients of the new rules, sending information regarding the changes to previous clients, and updating reporting letters and precedents are all steps to be considered. Lawyers should also assist their clients to meticulously gather and verify beneficiary information to facilitate compliance with the new rules.
Conclusion
The potential new reporting rules for bare trusts mark a significant shift, aiming to enhance tax transparency and combat evasion. Trustees and advisors may need to adapt to the expanded reporting requirements and heightened disclosure obligations. While the new rules may be a burden for clients and professionals, they may also have a valuable role in assisting clients to clarify their intentions regarding joint ownership at the time of the transfer or purchase. Confusion, or even litigation, regarding the parties’ intentions may be avoided if financial institutions and professionals require more information at the outset. Whether all such ownership arrangements will be subject to the CRA reporting requirements in 2024 remains to be seen.
*This article is not intended to be legal advice and should not be relied on as such. Anyone with questions concerning the new reporting requirements is encouraged to seek legal and/or accounting advice regarding their particular circumstances.
[1] https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2024/bare-trusts-exempt-from-trust-reporting-requirements-2023.html
[2] Lawyers’ trust accounts are exempt.
[3] Again, subject to the excluded “listed trusts.” See section 150(1.2) (a) to (o) of the Income Tax Act.