You Have a Bare Trust!
The 2023 personal income tax season has been underway since February 19 2024 when CRA opened to e-filing. And for most taxpayers, there are not a lot of changes compared to the 2022 tax year.
But there is a major change in reporting Bare Trusts as of December 31 2023.
Do not stop reading thinking that this does not apply to you! We have started asking all of our clients if they have a Bare Trust … any many do, but do not know it.
Does this situation describe you?
Here are some examples of Bare Trusts that taxpayers are unaware of:
- I am a joint account holder on someone else’s account; for example, you may have been added to your parent’s (or another individual) bank account to help with financials;
- I have an account that is joint with others to help me with financials, for convenience or for estate planning reasons; for example, you may have added an adult child(ren) or another individual to your bank account;
- I am a joint owner on property to co-sign the mortgage or credit line; for example, your adult child needed you to co-sign the mortgage so they could buy the home; UHT (Underused Housing Tax) return is also required (Dec 31 2022 only)… more about that later;
- My home is in joint names with my parent(s) so I could qualify for the mortgage; UHT is also required; read more later
- My child (or anyone else) is a joint owner on my home or other property or bank account for convenience or estate planning purposes; UHT may be required (Dec 31 2022);
- I own my home with my spouse, but only my name is on the property; for example, when a home is purchased, only one spouse was available to sign documents; or the spouse moved in after the home was purchased; UHT may also be required (Dec 31 2022);*
- My parent has gifted property (cottage, rental, farmland) to me, but (only) their name is still on the property; and I use the property or I receive the revenue generated by the property; farmland or other property;
- I own any other property and have added my child(ren)’s names;
- I opened accounts in trust (informal) for my children or grandchildren;
What is a Bare Trust?
As the above examples show, when the legal owners are different than the beneficial owners, then a Bare Trust exists. Someone is holding some or all of the assets in trust (informally) for someone else. When the assets are disposes (sold or when someone dies), the legal owner(s) may or may not become the owner of the asset.
What is a Bare Trust tax return?
If any of the above situations apply to you, you may need to file a T3 Trust return. There is normally no taxes owing, but you MUST file the return to avoid penalties. Information about all the parties (legal owners and beneficial owners) is required to be reported. You can check out CRA’s online information, but I recommend you get professional help to process this new requirement by CRA.
The normally filing date for T3 Trust returns is March 31 each year. But since this is the first year for the new filing requirements, CRA has announced they are waiving the penalties for this first year only for Bare Trusts only. The penalties for not filing or filing late are steep: $25 per day late, minimum $100, maximum $2500.
There are some exceptions to filing if the assets are under a certain limit, but I would rather discuss it with the client before determining a tax return is not required. There are too many “it depends” scenarios to describe in an article.
Why does CRA care?
For most of the above situations, CRA really does not care about. However, there are some bare trust situations that CRA is interested in; and future taxes may be payable on future capital gains; or perhaps the income has not been reported by the correct party: the beneficial owners.
But for CRA to find out about these taxable situations, they need to cast a wide net to get ALL bare trusts to report. Once they have everyone in the net, they let most of the “fish” go (most of the situations above) until they get the “fish” they are really looking for… the ones that will have some taxable situations that otherwise may have been undetected and unreported (intentionally or unintentionally).
I have met with a few clients that have Bare Trusts that may have future tax situations. Majority of the clients we have met or spoken with so far either do not have any Bare trusts, or may need to file a T3 Trust Return, but there is likely no tax to be paid.
Underused Housing Tax UHT
And there are a few Bare Trust situations that hold residential property that may require a UHT tax return to be filed. These are for December 31 2022 only. CRA has changed the rules and filing dates a few times in the past 12 months, so we do have until April 30 2024 to file these returns that are dated December 31 2022.
Asking ALL clients
This is one more question we have to ask all our client this year: do you have a Bare Trust situation that we need to review. We will determine if you need to file a T3 Trust tax return and if you need to file a UHT tax return. We invite all our clients to call our office to discuss any potential Bare Trust situations even if you are not quite ready to file your 2023 personal income tax return quite yet.
If you are not a client, we suggest you review CRA’s online information about Bare Trusts.
Anni Markmann is a Personal Income Tax Professional and Certified Financial
Planner; living, working, and volunteering in our community. Contact Ste
Anne Tax Service at 204.422.6631 (phone or text!) or 36 Dawson Road in
Ste Anne (near Co-op) or info@sataxes.ca