Clients should carefully consider trust reporting after new rules and severe penalties announced

FRIDAY, FEBRUARY 16, 2024

Penalties now apply in scenarios where you hold assets on behalf of someone else and you don’t report this relationship to Canada Revenue Agency. A wide variety of trust agreements detailed below are now liable for penalties equal to the greater of $2,500 or 5% of the fair market value of property held by the trust. The 5% penalty only applies in cases where a taxpayer knowingly neglects to file. As a result, it is very important to take the time to consider possible situations where reporting may be required. While the tax collection policies have not changed, the reporting requirements have.

Many involved in bare trust agreements may not think of an arrangement in those terms. Therefore consider the following question: what do I own where there is a mismatch between legal and beneficial ownership? A few common examples include: 

-        parents on the title of a child’s home to assist in getting a mortgage,

-       a parent holding an investment or bank account for a child,

-       one spouse being on the title of a house with the other spouse a partial beneficial owner.

-       an individual or corporation holding on investment on behalf of others.

-       adult children who have their name on their parents’ bank account or investment account 

Bare trusts are frequently used in real estate transactions or as part of probate planning. For example, for estate planning or administrative purposes, legal title to a Canadian vacation property may be registered in the name of a corporation or a trustee, even though the beneficial and economic ownership is held by another individual or entity.

New Filing Requirements

Bare trust relationships must now file a trust tax return each year. They need to report the identity of the parties involved, the settlor, trustee and beneficiaries and provide specific information about each person to CRA, including: 

·      Name;

·      Address;

·      Date of Birth;

·      Residence jurisdiction;

·      Social Insurance Number or the foreign tax identification number.

Certain trust are exempted from filing a trust tax return. The most common exemptions apply to trusts with assets with a fair market value under $50,000 throughout the year and the only assets held by the trusts consist of money and investments listed on a designated stock exchange.

The good news is that the CRA announced that it will provide temporary administrative relief to bare trusts. It will waive the late-filing penalty for the 2023 taxation year for bare trusts that file their T3 return and Schedule 15 after the 30 March 2024 filing deadline as long as the tax return is not knowingly filed late. If you discover a bare trust relationship after the deadline CRA may waive the late filing penalty. The CRA noted that it is providing this administrative relief because this is the first taxation year in which bare trusts will have a T3 filing requirement.