New, expanded rules for beneficial ownership reporting have come into effect for taxation years ending after Dec 30, 2023, which could significantly impact a broad swath of Canadians. Of particular note is the new requirement to file a T3 Trust Income Tax and Information Return and Schedule 15 Beneficial Ownership Information of a Trust for what are known as “bare trusts.” The primary concern with this reporting rule is that many people may be beneficiaries of one or more bare trusts without realizing it, and the deadline to submit their T3 to the Canada Revenue Agency (CRA) is rapidly approaching. The deadline to submit these documents is April 2, 2024.

You may be asking yourself, what is a bare trust?

While bare trusts can occur in relation to both personal income tax situations and business or corporate relationships, this article will focus on the personal income tax side of this issue.

A bare trust for income tax purposes is a trust in which a person is listed on the legal title of an asset (property, financial investment or account) but does not hold the asset as a true beneficial owner. Beneficial owners receive the benefits of the asset (earned income, proceeds if the asset is sold, etc.) and are responsible for the costs and/or risks that come with ownership (property taxes, repairs, injury liability, etc.). 

A person who is on the legal title but is not a beneficial owner is considered a trustee. A trustee doesn’t really have much power or responsibility over the asset. They can’t do anything with the money or assets without getting instructions from the beneficiaries. The trustee’s main job is just to hold onto the legal ownership of the funds or assets. If there are multiple beneficiaries, the trustee would need to get instructions from each one before doing anything with the money or assets.

Some common examples of bare trust arrangements include:

· A parent on the title of a child’s home without having beneficial ownership to assist the child in obtaining a mortgage.

· A parent or grandparent holding an investment or bank account in trust for their child or grandchild.

· A spouse on the title of a house or asset, and the other spouse is at least a partial beneficial owner.

· A child on the legal title of their parent’s home (without the child having beneficial ownership) for estate planning or probate purposes.

· A child on their parent’s financial account(s) to facilitate the administration of the asset(s) upon the parent’s passing.

There are exceptions to these trust filing requirements. Some common exceptions include: 

· Trusts that have only existed for less than three months by the end of 2023.

· Trusts that only hold assets within a very restrictive prescribed listing (including cash and publicly listed shares) with a total fair market value not exceeding $50,000 at any time during the year.

· Registered charities and non-profits.

The new reporting rules require bare trusts to file an annual T3 Return and Schedule 15. The Schedule 15 will include information on all trustees (those on the title or holders of the asset), beneficiaries (those who really own the asset), settlors (those who originally owned the asset), and anyone who could reasonably influence trustee decisions regarding the income or capital of the trust. In some cases, the beneficiary will not be known at the time of filing, such as in the case of unborn children or grandchildren. In these cases, the Schedule 15 must detail the terms of the trust that extend the class of beneficiaries to unknown entities. 

Failure to follow the new reporting rules can result in strict penalties of $25 per day, up to a maximum of $2,500, in addition to any penalties on unpaid taxes. If a required form is missing information, there can be a penalty of $100 per occurrence. If a form is missing substantial information, the CRA can consider it invalid and impose a penalty of up to $2,500.

In cases of gross negligence or false statements, the maximum penalty is even higher—$2,500 or five percent of the fair market value of all property held in the trust, whichever is greater.

There are also tax and non-tax related incentives for ensuring that all reporting requirements are submitted. Beneficial owners will need to properly file their annual T3 Returns to continue to receive certain tax benefits (like the principal residence exemption). Trustees who do not declare their status in a bare trust could possibly find themselves paying the beneficiary’s tax bill.

With these newly expanded reporting requirements coming into effect for the 2023 tax year, there will be many Canadians who will be filing these documents for the first time and may be uncertain of the process. Fortunately, the CRA is using an “education-first” approach and is waiving the penalty payable for the 2023 tax year for bare trusts in situations where the T3 Return and Schedule 15 are submitted after the filing deadline, except for situations of gross negligence.

Visit canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html#toc2 for more information about the new reporting requirements and deadlines.

In light of the steep fines and other consequences for failing to follow these new reporting requirements, familiarizing yourself with them is critical. Please consider consulting an accountant or tax specialist if you are unsure whether these new rules apply to your situation or do not know how to proceed in filling out and submitting the required paperwork.

By Dean LaBerge, Local Journalism Initiative Reporter

Original Published on Mar 20, 2024 at 16:27

This item reprinted with permission from   Grizzly Gazette   Swan Hills, Alberta

Comments are Welcome - Use the 'Join the Discussion' above any replies, or 'TheRegional / Chat' below replies. Both links take you to the same place. You will be asked to become a registered user if you are not one already - Posts are moderated