Bare Trust
For 2023 and the following taxation years, “bare trust” must file a T3 tax return in Canada or face penalties. The 2023 tax year deadline is April 2, 2024.
What is “Bare Trust?”
Under the Income Tax Act (Canada), a “bare trust” is a relationship where a trustee “ can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealing with the trust property.” To put in a clear language, one person appears on legal documents for the property, but a completely different person gets to enjoy the benefit (risks) of owning the property, such as being entitled to income from the property, paying for its expenses, or keeping the proceeds when the property is sold.
There are Four Common situation that a bare trust exists.
Case 1: If you are your parents’ power of attorney, and have the right to sell their property, the bare trust exists.
Case 2: Your kid may not qualify for financing for the purchase of a real estate property, you being an guarantor and has the legal title of this property, the bare trust exists.
Case 3: Your corporation purchase an investment property , the down payment was transferred from your personal account. When the property transaction close, you and your corporation sign “ declaration of trust” with the corporation has the legal title of the property. The bare trust exists.
Case 4: If you and your children (under 18) has a joint account, and you are the only person to act on behalf of this account, the bare trust exists.
How to identify and test the bare trust.
Step 1-define your legal owners
Step 2-define your beneficial owners: who pays for the maintenance, who provide down-payment, who is claiming CCA on the asset, who will keep the proceed, who pays for the property taxes, etc.
Step 3-Compare your legal owners and your beneficial owners
Step 4- Do you have a Bare Trust or a Regular Trust
Are bare trusts now required to file an annual T3 Return and Schedule 15?
Bare trusts are subject to the new trust reporting rules for tax years ending after December 30, 2023. Similar to all trust subject to the new reporting rules, a trustee of a bare trust is required to register for a trust number.
The trustees are the ones who need to file. In the above examples, the parent who co-signed the mortgage or opened an account for a minor child, or the adult child who has joint ownership of a parent’s account must file.
Penalties for failing to file.
Under subsection 163(5), the gross negligence penalty is equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.