Several proposed amendments to tax laws announced last year are facing uncertainty after taxpayers and other stakeholders criticized them. One of the rule changes facing uncertainty is the bare trust filing tax for the 2024 tax year. Get ready, as things are about to get confusing.

Update on the Bare Trust Filing For 2024

Before entering tax laws, a bare trust is a written or verbal arrangement between the trustee and the beneficiary. The trustee only holds the legal title to the asset on behalf of the beneficiary and has no discretion over the asset. The trustee only follows the instructions of a beneficiary. Such trusts are generally not required to file taxes as any profit or income from the assets held is not of the trust but of the beneficiary. The beneficiary reports income and capital gain from that asset in their tax returns.  

2022 proposal: The 2022 amendments required some bare trusts to file T3 tax returns and Schedule 15 disclosure for the 2023 tax year ending December 31, 2023. The penalty of $25 a day was applied for any delays in filing beyond April 2, 2024 (minimum penalty of $100 and maximum $2,500). An additional penalty, the higher of $2,500 or 5% of the maximum property value held by the trust during the tax year, would apply if the failure to file was made knowingly or due to gross negligence.

2023 exemption: Many stakeholders criticized the rule change as it required bare trusts to file returns for the first time. The rule was subjected to an ombudsperson investigation. Hence, the Canada Revenue Agency (CRA) exempted bare trusts from filing for the 2023 tax year.

2024 uncertainty: A draft legislation was introduced on August 12, 2024. It tries to broaden the scope of bare trusts exempted from filing with the below proposals:

• Trusts are where all trustees and beneficiaries are individuals, and each beneficiary is related to each trustee.
• Trusts that hold any asset whose fair market value (FMV) is $50,000 or less throughout the tax year. The $50,000 exemption exists even now but only on certain types of assets. The draft legislation would remove the complexity of qualifying asset types. 
• Trusts that hold certain types of assets whose FMV is $250,000 or less throughout the tax year. These assets include deposits, guaranteed investment certificates issued by Canadian banks, debt obligations issued by the government or a publicly listed entity, personal-use property, and listed securities.

The legislation also states that the bare trusts need not file T3 returns for 2024 unless they receive a direct request from the CRA for the filings. However, it is a draft legislation and needs to become a law. If the bill does not pass in the Parliament before the 2024 tax deadline (March 31, 2025), the old rule will remain in effect, and bare trusts must file the T3 return.

Whether to file or not to file? The answer depends on how the draft legislation progresses.

How to File Returns for Bare Trusts

The whole confusion around the filing requirements applies to trusts that qualify. Until the confusion is resolved, you should be prepared to file the returns. Since it will be your first time filing returns, you may have to apply for a trust account number. You may also have to fill out the T3 trust return and Schedule 15, wherein you submit details of reportable entities like name, address, date of birth, jurisdiction of residence, and taxpayer identification number (social insurance number, business number, trust account number, or foreign TIN).

Reportable entities include the trustee, beneficiary, settlor, and controlling person who can influence the trustee’s decisions on the income or capital of the trust. A settlor consists of the person who helped the trust sell the property, lent money, paid trust expenses, or participated in an estate freeze in favour of the trust.

Trusts that have been filing returns need not submit Schedule 15 again unless there are any changes. This is because the CRA will carry forward the previous year’s returns. If a corporation is a trustee or beneficiary in a bare trust, that trust will have to file a T3 trust return and a T2 corporate income tax return.

Contact Ford Keast LLP in London to Help You With Your Bare Trust Filing

Uncertainty around tax laws is making tax compliance even more difficult. A professional tax consultant can help you navigate the changing rules, stay compliant, and avoid late filing penalties. At Ford Keast LLP, tax experts and accountants can provide services such as filing taxes. To learn more about how Ford Keast LLP can provide you with the best taxation expertise, contact us online or call us at 519-679-9330.