Often when we sit with clients who ask us about the benefits of placing their names jointly on their properties or investments with their children, or discuss needing to place their names on a mortgage with their children to help them out and we advise of the potential pitfalls of doing so. Effective immediately a plan of this nature has added an additional pitfall. The Government of Canada recently passed amendments to the Income Tax Act which impact the requirements for Trusts to file a T3 Trust Income Tax and Information Return ("T3 Return"). Starting for the 2023 year, all "express trusts" must file a T3 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

What is a Bare Trust? 

A bare trust is a basic trust in which the beneficiary has the absolute right to the capital and assets within the trust, as well as the income generated from these assets.

Trust assets are held in the name of a trustee, who has the responsibility of managing the trust assets prudently to generate maximum benefit for the beneficiaries or as lawfully directed by beneficiaries or the trust's creator. However, the trustee has no say in how or when the trust's capital or income is distributed.

Common Examples of Common Bare Trusts

1. 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 “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. 

2. 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 unless they meet the exemption threshold as below.

3. Often a child adds a parent to the title of their real estate to obtain financing. 

4. With Corporate reorganizations, it has been very common to transfer the beneficial ownership of real estate from one taxpayer to a corporation. The legal title is not transferred so that Property Transfer Tax is not payable. This arrangement is a bare trust and now has a reporting obligation.

5. Legal title for real estate is held on behalf of a group of owners in a joint venture or partnership.

There are some exemptions where you don’t have to file a T3 Return which include:

• Trusts governed by certain plans (i.e. RRSP, RRIF, TFSA, etc.)
• Graduated rate estates and qualified disability trusts
• Mutual fund trusts and trusts listed on a Canadian stock market

New Reporting Requirements 

There is additional information required as well as 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 date required to file a T3 Return is 90 days after the end of the year-end for the Trust. Most trusts have a December 31st year-end, which means that the due date for the 2023 T3 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 

Though it is too late to undertake any planning to reduce the reporting obligations for the 2023 year, there 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 any in-trust accounts that are no longer necessary. If these changes are made in 2023, then the Trust would still have an obligation to file and report this detailed information in its 2023 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.

We are here to help, if you feel that any of these examples apply to you, please contact us and your tax professionals immediately. 

The information above is from sources believed to be reliable; however, we cannot represent that it is accurate or complete and it should not be considered personal tax advice. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.