New tax legislation is being enacted which requires increased tax reporting for existing trusts and will create filing requirements for other trusts which are “express trusts”, including Bare trust agreements.
The new legislation is effective for trust year ends ending on December 31, 2023 and onwards.
The purpose of this legislation is to increase transparency of beneficial ownership and provide more details regarding control of assets to the government.
Penalties are up to $2,500 for failure to file, plus an additional $2,500 if the failure was made knowingly or under gross negligence.
The additional reporting includes information about the settlor, trustee(s) and beneficiaries. As the additional reporting is contained within the tax return, a tax return may be required to be filed where it previously was not.
For existing trusts for which our office prepares an annual tax return, we will contact the trustee to obtain necessary information for the additional reporting.
An annual tax filing (and disclosure of information therein) will also now be required for an inactive trust that previously was not required to file a return, as well as for a “Bare trust”.
A Bare trust is where the trustee has no obligation other than to deal with the trust property as instructed by the beneficiaries. The legal title of the trust property is held by the trustee, but the beneficiary has beneficial ownership.
Bare trusts are commonly used for the following purposes:
- To ensure privacy and anonymity of the owner of a property when the ownership information, such as land registration records, are public record;
- To gift a minor with property who cannot hold a legal title;
- To hold legal title of a property on behalf of a group of owners in a joint venture or partnership;
- To minimize provincial land transfer taxes or probate fees in certain transactions;
- To guarantee a mortgage for another party, where the other party is the beneficial owner of the property.
Thus far, we have been made aware of the following proposed exemptions:
- Bare trusts in existence less than three months at the end of 2023
- Trusts that hold assets with a maximum of $50,000 in FMV throughout the year (these assets are limited to deposits, government debt obligations and listed securities)
- Certain trusts required by law or under rules of professional conduct to hold funds related to the activity regulated thereunder
- Charities and non-profit clubs, societies, or associations.
- Mutual fund trusts, segregated funds and master trusts
- Graduated rate estates
- Qualified disability trusts
- Employee life and health trusts
- Certain government funded trusts
- Trusts governed by registered plans (including registered retirement savings plans and tax-free savings accounts)
- Cemetery care trusts and trusts governed by eligible funeral arrangements
No further guidance for bare trusts as to the breadth of this has been provided to date by either the Department of Finance or the Canada Revenue Agency.
*STAY TUNED* for more once we receive further guidance and details from the government as we progress through 2023.
