Navigating the New Era of Trust Reporting for Bare Trusts: Implications and Practical Considerations for Bill C-32

Do you have an arrangement in place with a family member, corporation, or related party where you are holding an asset in trust for them? Is the asset registered in your name, but beneficially owned by someone else? If so, you may be a party to a “bare trust” relationship and you may be subject to new Canada Revenue Agency (“CRA”) reporting requirements after December 31, 2023, as a result.

Bill C-32 received Royal Assent on December 15, 2022 and includes a new CRA trust reporting regime that will come into effect on December 31, 2023. Given the extent of the changes and the severity of penalties for non-compliance, everyone should be ready to meet these new obligations for 2023 and subsequent taxation years.

The Current Rules

Under the current rules, a trust (including a bare trust) must generally file an annual income tax return (a “T3 Return”) for a tax year if the trust: (i) has tax to pay for the year; (ii) disposes of capital property; or (iii) distributes all or part of its income or capital to trust beneficiaries. Trusts that are required to file a T3 Return do not have to identify all of the trust’s beneficiaries. Further, no T3 Return is required from trusts that are deemed inactive or have no income or taxes payable. It is usually not necessary under the current rules to disclose bare trusts to CRA, or to file T3 Returns, as many bare trusts do not have income or taxes payable.

The New Rules

The new reporting requirements will require trustees of a trust (including a trustee of a bare trust) to file a T3 Trust Income Tax and Information Return annually for tax years ending on or after December 31, 2023.

Wait, what is a Bare Trust?

A bare trust exists where a person (the trustee) holds legal title to property for the benefit of another person (the beneficiary). The trustee has legal ownership of the property but has no other duties, obligations, or responsibilities with respect to the property, other than to transfer the title to the property as directed by the beneficiary. The trustee in a bare trust may be a nominee corporation. A bare trust relationship could be set out in a number of different legal agreements, which might be called “Bare Trust Agreement”, “Nominee Agreement”, “Declaration of Bare Trust”, or “Agency Agreement”.

Bare trusts can be used in a number of different contexts, including real estate and estate planning. If you farm in partnership, how is the farmland owned? Is a nominee corporation the registered owner of the farmland? If so, you may be party to a bare trust relationship.

Okay, I think I have a Bare Trust Arrangement… What does this mean for me?

Trusts that are subject to the new rules will be required to file a trust return and report additional information to CRA regarding all “reportable entities,” which include all of the trust’s trustees, beneficiaries that are known or ascertainable, and settlors, and in some instances, a protector of a trust, regardless of whether the reportable entity is an individual, a corporation, or a different trust. The information to be reported for each reportable entity includes:

• Name
• Type and classification of entity
• Address
• Date of birth (if a natural person)
• Country of residence
• Taxpayer identification number, such as social insurance number, trust account number, business number or taxpayer identification number used in a foreign jurisdiction

What happens if I don’t file this information?

The current penalty for not filing a T3 return when required will continue to apply and it will also apply if the required additional information is not included with the return. The penalty is currently set at $25 for each day the information is not provided, with a minimum penalty of $100 and a maximum penalty of $2,500.

The new rules impose a significant additional gross negligence penalty where a failure to file the return was made knowingly or due to gross negligence. The additional penalty is 5% of the maximum value of the property held by the trust during the applicable year, with a minimum penalty of $2,500. This penalty would also apply to false statements and omissions amounting to gross negligence, as well as a failure to respond to a CRA demand to file.

Conclusion

If you have a trust or a bare trust arrangement, you are likely subject to the new reporting requirements and should familiarize yourself with them before the end of 2023. If you are unsure whether you are subject to the new reporting requirements, please contact a member of our Tax Law practice group.