How does the new reporting requirement apply to Bare trusts?
Effective for taxation years ending after December 30, 2022, Bare trusts may be required to file a T3, Trust Income Tax and Information Return. Therefore, trusts with a calendar year-end will be subject to the new reporting requirements starting on December 31, 2022, year end and must file a return by March 31, 2023.
What is a Bare trust?
A Bare trust is generally a trust relationship whereon the trustee has no obligation other than to dispose of the trust property as instructed by the beneficiaries. The trustee’s only function is to hold legal title to the property. They do not have any independent power, discretion or responsibility pertaining to the trust property. In other words, they cannot act without instructions from the beneficiary who retains absolute control and rights to the trust property.
For what purpose is a Bare trust used?
– To minimize property transfer taxes and fees in real estate transactions
– To hold securities and funds in trust, including publicly traded shares, bonds, or options, legally registered in a broker’s name
– To administer joint ventures and partnerships where a nominee holds legal title to a property on behalf of a group of owners
– To facilitate corporate reorganizations where the legal ownership of property may otherwise need to be transferred and registered through multiple entities
– To enable the immediate transfer of beneficial ownership between parties where legal or regulatory impediments prevent a contemporaneous transfer of legal title
– In estate planning, to minimize the fees, costs and time associated with probate
– To gift a minor child or children with property who cannot hold a legal title
What are the tax implications of a Bare trust?
Because the beneficiary retains beneficial ownership over any property subject to a bare-trust relationship, this type of trust is generally ignored for income tax purposes. For example, if a person retains beneficial ownership while transferring legal title to a bare trustee, the transfer will not trigger a taxable event because it does not constitute a disposition. A taxable event is triggered when there is a change in beneficial ownership. In this situation, beneficiaries are required to report all income and capital gains from the Bare trust on their individual returns to be taxed, there are no tax implications to the trust itself. This will change if the new reporting requirements are implemented, however, only the reporting obligations will be impacted the tax treatment will remain the same.
Exemptions to new reporting requirements
Certain bare trusts may be exempt from the new reporting requirements if the following criteria are met:
– They have existed for less than three months in the year
– They hold no property other than cash, certain government debt obligations and certain listed securities, and the property’s value does not exceed $50,000 at any time during the year
What are the penalties for non-compliance?
The potential penalties for failing to file a return are severe. If a Bare trust fails to file a trust return under the new reporting requirements the penalty will be $25 per day, with a minimum penalty of $100 to a maximum of $2,500. In addition, trusts will be subject to an additional gross negligence penalty whereon the minimum penalty is $2,500 up to five per cent of the maximum value or property held by the trust during the taxation year. In such situations, a failure to file will have been made knowingly or under circumstances amounting to gross negligence.
How can DMC help?
The new reporting requirements remain subject to revision; however, it is strongly recommended that trustees start to familiarize themselves with the proposed changes. If you would like to know more on the proposed changes, call our office to speak with one of our CPAs. We would love to answer your questions and assist you with preparing your submissions.