25 April, 2024 Financial Planning

Planner's Corner: Bare Trusts

You may have heard about the need to report bare trusts when filing your tax return from your accountant or financial institution. Below we provide information on what is a bare trust, why it is important, what the recent commotion was about and my thoughts.

What is a bare trust?

A bare trust is when the beneficiary, if they are over the age of 18, has the absolute right to the capital and assets within the trust, as well as the income generated from these assets. Examples of bare trusts are when parents open an account "in trust" for their children, when children are added to bank accounts and property of aging parents and when parents are put on title of an adult child's home to help them qualify for a mortgage.

Beneficiaries are the legal owner of these assets, so the income generated in the form of interest, dividends, and rent is taxed to them. In the case of an 'in trust' account for a minor beneficiary, the parent or grandparent is taxed on the income, and the minor child is taxed on the capital gains. Along with some other exceptions, accounts with a value of $50,000 or less are exempt from reporting.

Bare trusts must be disclosed through the filing of a T3 Trust Income Tax and Information Form (T3) and a related Schedule 15: Beneficial Ownership Information of a Trust. The T3 is designed for complex trusts for high net-worth individuals and their families which make it intimidating to complete. As well, Canada Revenue Agency (CRA) has not provided a lot of guidance. Prior to filing a T3 Trust Income Tax form, a trust account number must be obtained by making an application to CRA. For most trusts, there is no additional tax payable as income is reported to CRA via T5 slips and claimed by the beneficiary on their individual tax return.

Why is it important? What's all the recent commotion about?

On March 29, 2023 "In recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians", Canada Revenue Agency (CRA) exempted bare trusts from having to file a trust return or Schedule 15 for 2023 unless the CRA makes a direct request. The deadline for filing of trust returns was April 2, 2023, for trusts with year-ends on or after Dec 31, 2023. This marks the third time the CRA announced relief for bare trusts. The stricter reporting rules were first proposed in the 2018 federal budget to combat "aggressive tax avoidance, tax evasion, money laundering and other criminal activities" and as part of Canada's international commitment to the transparency of beneficial ownership.

My thoughts…

It's an example of "using a sledgehammer to kill a fly" which has resulted in unintended consequences. Almost all income is reported via tax slips and usually the beneficial owner is claiming the income on their tax returns so it's not something that's going to generate significant increased tax revenue. It makes it more difficult for the average individual to file their own tax returns prompting the need to hire a professional tax filer. It also adds another consideration when adding a name to an elderly parents' account as there is increased reporting requirements.

I believe it would be more efficient if the CRA left the reporting requirements to financial institutions who are already reporting to Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). The requirement to file a T3 return should be for accounts that are not being reported in this manner (e.g. real estate, etc.) and formal, more complex arrangements. Hopefully CRA amends its requirements.

Jim Hummel, CFP® CKA®

"CRA exempts bare trust from reporting requirement for 2023" Rudy Mezzetta, advisor.ca, March 28, 2024
"A guide to family finances and bare trusts" Rob Carrick, the Globe and Mail, March 26, 2024
"A how-to for people caught up in CRA’s confusing new rules for reporting bare trusts" Rob Carrick, the Globe and Mail, March 19, 2024