A Brief Discussion: Beware of Bare Trusts

by: Jeffery A. Keill, CFP, CIM, FMA, FCSI Portfolio Manager and Senior Wealth Advisor 

Like so many other poorly developed and launched Government pieces of legislation, the new Bare Trust rules seem to have the same DNA. It casts a wide net that will surely capture many unintended people and may lead to potentially significant penalties for non-compliance. The new rules came into effect on December 15th, 2022 when it was given Royal Assent and applies to trusts with tax years ending on December 31st, 2023.

What is a Bare Trust?

First let’s review what a trust is. A trust has three basic participants: a Donor/Settlor, a Trustee, and a Beneficiary and in the simplest of terms, exists when the Settler placed something of value into the hands of the Trustee to oversee for the benefit of the Beneficiary. In other words, the Donor gifts, the Trustee manages, and Beneficiary receives the result. These three people could be a mix of different people or the same person to some extent. This happens more often than people might imagine. Various accounts like RRSP, RRIF’s, TFSA are basic trusts and why many Self-Directed accounts have ‘trustee fee’s’. Further to this, many mutual funds structured in Canada flow through Trusts and the reason you would receive T3 slips from them at tax time. A Bare Trust is a specific kind of trust where the trustee has no obligation other than to deal with the trust property as instructed by the beneficiaries. Essentially a bare trust is a principal-agent relationship where the legal title of the property, in all or part, is held by the trustee but the beneficiary has the beneficial ownership and control.

When is a Bare Trust Used?

A bare trust arrangement is used frequently in larger more complex transactions involving real estate or corporations but can also be used by individuals, which is the purpose of this paper. Bare trust can be used for:

• Providing privacy and anonymity of the true owner of property where information is available as public record.

• Facilitate an efficient transfer or multi transactions in a corporate restructuring.

• Minimize land transfer taxes or even the reduction of probate fees on real property.

• Gift property to a minor child who can not hold title to property.

• Provide efficient management of financial affairs for someone who has limited capacity.

There are a few more common bare trusts that people may not realize could be captured by this new tax law. Most of these situations arise from activities individuals did simply for estate planning for making the management of personal affairs easier. Property held jointly with, or in care of, a family member who is not your spouse.

Consider for example:

• A son on title of the family home or cottage with the mother or father to help reduce the probate fees upon the death of the parent.

• The joint account with a parent or adult child that was set up at the bank for the purpose of easier day-to-day bill payments.

• In-Trust for Accounts for minor children.

What has changed?

If the taxation of the trusts has been around for some time, what has changed?

The term bare trust is a term to explain the legal relationship between two or more parties and actual wording is not contained in tax legislation. A bare trust filing has been generally disregarded by CRA for trusts who have no taxable income. The requirement to file a return and the levy of taxes has not changed as that already existed. The tax treatment on income has not changed, but the filing requirements have changed regardless of income in the Trust. In simple terms in the past, you were required to file a Trust Return (T3) for income earned and taxed in the trust or if income flowed down to a beneficiary (T3 Slip) to be taxed by them.

In situations where no taxable event happened in a given tax year, there was not always a need to file a T3 return. Under the new legislation, the simple existence of a bare trust may require the completion of a T3 Return and disclosure of certain details.

In addition to the basic filing, a disclosure of additional information about the beneficial ownership and stakeholders (such as Trustees, Beneficiaries, Settlors, and anyone else who has the ability to exert control) is also required.

There are a few exemptions from the new reporting requirements that the Government seems to put in place to help ease the unexpected burden on taxpayers:

• A bare trust, with no income, which have been in existence for less than three months during the tax year.

• Registered Accounts such as RRSP’s, RRIF,’s etc.

• A bare trust where the value held inside the trust relationship was during the tax year under $50,000.

What are the penalties for non-compliance or non-filing?

The penalties for non-compliance can be significant. The basic penalty would be $25 per day (minimum of $100 and a maximum of $2,500). In addition, a penalty of the greater of $2,500 or a whopping 5% of the highest value of the property held in the trust during the tax year where knowingly failing to file or due to gross negligence. This additional penalty can be substantial when you consider some trust have large values in financial assets or real estate property.

In December 2023, the CRA has delayed the enforcement of the late filing penalty under certain conditions. It did not remove the requirement to file the Trust Return just the relation of the penalty. Into future years, the penalty will be enforced.

How will this possibly affect me?

The possible need to file a T3 Return will require additional work for self-filers and most likely additional tax preparation costs for those who seek out the support of tax professionals. Non-filing of course will have the dramatic impact of future penalties. There will likely be many people who will unknowingly fail to file when they should have. Many of whom are the least capable in our society to understand or pay the penalty or non-filing.

What should I do?

It is our recommendation that where you believe a bare trust relationship may exist in your financial situation, you should contact your tax professional. We also recommend where you are uncertain, or fail to get adequate advice, is to file a T3 Return for 2024 and years following to ensure compliance. Further to this, individuals are advised to seek advice on the benefits of continuing the use of the bare trust arrangement to meet their family’s financial needs.

Disclaimer and Notice to Reader: This Discussion Paper should not be construed as legal or tax advice but rather only as a general statement and explanation of the topic matter. Professional tax and legal advice should be obtained for the readers own personal situation. For more information on this topic or how it applies to your family, please contact our Wealth Advisory team.

Last Edit Jan 29, 2025