The Government of Canada recently passed amendments to the Income Tax Act which impact the requirements for trusts to file a tax return. Starting for the 2023 year, all “express trusts” must file a tax return even if they are inactive or were previously exempt from filing.
Examples of express trusts include:
- Family Trusts
- Alter Ego or Joint Partner Trusts
- Bare Trusts
The first two are “formal trusts” meaning they are formed with the intention of setting up a trust along with a trust deed/agreement. However, bare trusts are “informal trusts” where the parties did not necessarily intend to set up a trust but ended up doing so as a result of their actions.
What is a Bare Trust?
A bare trust is where the legal title of an asset is held by a trustee but a beneficiary has the beneficial ownership of the property. A bare trust is effectively a principal-agent relationship, which means that the trustee has no independent power, discretion, or responsibility over the property as the beneficiary has control over the trustee’s actions.
Examples of Common Bare Trusts
- As parents age, it is common for them to add their children to the legal title of their real estate. This can reduce the probate on the parent’s passing and ease estate administration. The children don’t really “own” the property until their parents pass away. These arrangements are considered bare trusts and now have a reporting obligation, even if there is no formal document that sets out the arrangement.
- Also, as parents age, children are frequently added to their parents’ bank and investment accounts for the same probate and estate administration reasons. These arrangements are also considered bare trusts and may have a reporting obligation.
- A child adds a parent to the title of their real estate to obtain financing.
- In corporate reorganizations, it has been very common to transfer the beneficial ownership of real estate from one taxpayer to a corporation. This arrangement is a bare trust and now has a reporting obligation.
- Legal title for real estate is held on behalf of a group of owners in a joint venture or partnership.
New Reporting Requirements
In addition to the new requirements to file, detailed information must be provided for all trustees, beneficiaries, settlors, and any person who can exert control or override trustee decisions on the appointment of the trust’s income or capital (e.g., a protector), including:
- Name and address
- date of birth
- country/jurisdiction of residence, and
- taxpayer ID, such as SIN, trust account number, business number, or taxpayer ID used in a foreign jurisdiction
Due Date
The due date for the trust tax return is 90 days after the end of the year-end for the trust. Most trusts have a December 31st year, which means that the due date for the 2023 T2 Returns is March 30, 2024 (due to 2024 being a leap year).
Penalties for Non-Compliance
The penalties for late filing or non-filing can be significant. For late filing, the penalty is $25 per day late to a maximum of $2,500 per year. In cases of gross negligence, there is a penalty equal to the greater of $2,500 and 5% of the highest fair value of the trust’s assets.
Future Planning
To reduce future reporting obligations, here are some practical tips to consider:
- Trustees should review their trusts to determine whether the trust should be wound up if it no longer serves its purpose. Close in-trust accounts that are no longer necessary. If these changes are made in 2024, then the trust would still have an obligation to file and report this detailed information in its 2024 return. However, this would reduce future filings.
- Consider restructuring existing trusts to remove beneficiaries that are no longer required so that you don’t need to disclose their information. Note: there is still an obligation to report the required information if they were a beneficiary for part of the year.
Action Items
Based on the information above, if you think you may have a bare trust, please contact us at info@srjca.com.