Naked facts about bare trusts

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  By Guest Blogger Sinan Terzioglu

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Trusts are an important legal arrangement used by many families for asset protection, property ownership arrangements and estate planning. To increase the transparency and compliance of those using and benefiting from trusts, the federal government has introduced new trust reporting rules which apply for taxation years ending December 30, 2023.

The new rules require almost all private trusts, including bare trust arrangements, that were previously not required to file a trust return to now file a T3 (Trust Income Tax and Information Return) plus a new Schedule 15 (Beneficial Ownership Information of a Trust), unless exceptions apply.

What is a bare trust?

A bare trust is a specific kind of trust where the trustee holds legal title to a property for the benefit of a beneficiary but the trustee has no power or discretion over the property.  The beneficiary has complete control plus beneficial ownership of the property including any income derived from it. There’s no requirement to sign legal paperwork to formally establish a bare trust in Canada so some Canadians may have unknowingly entered a bare trust agreement which now requires them to file a T3 and Schedule 15.

Examples of bare trusts that may trigger a tax filing requirement:

• Aging parents that have added a family member such as an adult child to the title of the family home to ease the future transfer of the property and avoid probate tax
• Aging parents that have added an adult child to their bank and/or investment accounts to help with bill payments and other transactions
• Parents that have added their names to the title of their child’s home to help them qualify for a mortgage
• Parents that have opened bank accounts for minor children
• Holding In Trust For (ITF) investment accounts for children, grandchildren, etc.

Examples of the types of trusts that are exempt from filing:

• Trusts that have been in existence for less than three months
• Lawyers general trust accounts
• Employer profit sharing plans
• Trusts that hold less than $50,000 in assets throughout the tax year so long as they only hold deposits, government debt obligations and listed securities
• Trusts of registered charities or non-profit organizations

Example #1: Don is not sure whether the new rules require him to file trust returns because there is no income generated in any of the current arrangements he is the trustee of. A couple of years ago his parents added him to the title of their home and they set up a trust arrangement to hold the family cottage which Don is the trustee of.

Even though there is no taxable income to report, under the new rules Don must file trust returns as well as additional information regarding all reportable entities which include himself as trustee, beneficiaries and settlors. The additional information must be provided on Schedule 15 and be filed along with a T3 return. He must include full names, type of entity, dates of birth, tax identification numbers (such as a social insurance number), addresses and everyone’s country of residence.

Example #2: Allan decided to set up a testamentary Henson Trust for his disabled daughter Shelly and appoint his brother Bill as trustee. Since the Henson Trust will not be established until Allan passes away Bill doesn’t know if the new rules require him to file a trust return.

A Henson Trust is structured to protect the assets of a person living with a disability while still allowing them to qualify for government benefits such as the Ontario Disability Support Program. A Henson Trust can be set up as an inter vivos trust (established during your lifetime) or as a testamentary trust (established when you pass away as per the terms of your Will). Even though the Henson Trust is not established or earning any income yet, the new rules require Bill as trustee to file a trust return.

Example #3: John is 67 and owns land. When John turned 65 he set up an alter ego trust and transferred the land to it so that when he passes away the land will not form a part of his estate and therefore bypass probate.  John was not required to file a trust return for the last few years so he is wondering if the new rules require him to file one going forward because he is the settlor, trustee and beneficiary of the alter ego trust.

Common trusts set up for estate planning purposes such as alter ego, joint partner and spousal trusts now have a trust reporting requirement so John as trustee must file a trust return for his alter ego trust.

Understand your obligations

Many trustees who have never had to report a trust disclosure before can easily be unaware of their new trust reporting obligations. Even though no taxes are owed for many bare trust arrangements, the new rules create an administrative burden so its important to consult with a tax professional to ensure you are meeting all of your trust reporting obligations because the April 2 deadline is approaching quickly.

Failure to file a trust return incurs penalties of $25 per day, ranging from $100 to $2,500. Knowingly failing to file results in an additional penalty of 5% of the maximum property value held during the year or a minimum $2,500, alongside existing T3 return penalties which can be significant and should be taken seriously.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

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About the picture: “Meet Presley, my 4yr old 70 pound golden doodle,” writes Vanessa,  “the smartest best girl in the world!!! My Will is set to leave everything to her lol.    I love your blog been reading for years at least since 2014 when Stephen Harper was our Prime Minister! (I’m kinda missing those days to be honest).  I’ve worked for a bank for 20 years in GTR (Toronto).  Thank you for all you do, I’ve learned so much from reading your blog all these years.”