Under new tax rules for 2023, almost all trusts must now file a T3 Trust Income Tax Return, regardless of activity or income.
The filing deadline is April 2, and a failure to file may result in penalties and unfavourable tax implications.
Notably, “bare trusts” are caught by the new rules, and it may surprise some taxpayers to know they are covered by the new requirements (and subject to the potential penalties for failure to comply).
Bare trusts
“In simple terms, a bare trust is a way to hold a property where one person (the trustee) is recorded as the legal owner of the property, but another person (the beneficiary) has complete control over the trustee’s actions in respect of the property and enjoys the benefits (and risks) of owning the property,” says Shane Landreville a trusts, tax, and estates lawyer at Ramsay Lampman Rhodes in Courtenay.
With a bare trust arrangement, the legal owner’s rights and responsibilities regarding the property are limited to merely holding the legal title. Many people do not know that bare trusts are not limited to formal trust arrangements or arrangements documented in writing.
According to Landreville, a substantial number of Canadian taxpayers act as bare trustees for family members, corporations, or business partners without being aware of it. The inclusion of bare trusts in new tax rules subjects this group of people to potential penalties, which is of particular concern.
Common examples of bare trusts
To illustrate the point, Landreville and his colleague at RLR, commercial lawyer Paul Ives, KC, created a list of common scenarios where bare trusts arise:
• A child is on title of a parent’s home for probate, convenience, or estate planning purposes only;
• A child is on parent’s bank/investment accounts (or other assets) to assist the parent, or for ease after the parent’s passing;
• A parent is on title of a child’s home to assist the child in obtaining a mortgage, even if registered for just one per cent;
• A parent or grandparent holds a bank account in trust for a child or grandchild;
• Only one spouse is on title to a house or asset;
• A corporate bank account opened and held by individual shareholders;
• A corporation is the registered owner of an individual’s real estate, vehicle, or other asset, and vice-versa;
• Assets are registered to one corporation but beneficially owned by a related corporation;
• Using a corporation to purchase land for real estate development purposes to conceal the identity of the true owner;
• A partner of a partnership is solely listed on a bank account or asset for all partners of a partnership.
Rationale for the rules may create unwelcome consequences for some
Landreville notes that the new rules are intended to help the federal government address tax evasion, money laundering, and other financial crimes and assist it in meeting its obligations internationally to help prevent financial crimes. While these are laudable goals, the legislation also creates potential landmines for unsuspecting Canadians who have no intention of running afoul of the law or the Canada Revenue Agency.
What should you do?
“Many people have accountants who file their annual tax returns, and that may be a good place to start, particularly with some of the more common scenarios,” according to Landreville. “Whether or not a trust exists is a question of law; therefore, it may be beneficial to talk to a lawyer who has expertise dealing with trusts to confirm whether your situation is caught by the new reporting rules.”
CRA intends to crack down
The CRA intends to enforce the new rules through audits and penalties. If the CRA audits you, they will likely follow the flow of funds. The penalty is $25 for each day the return is late, with a minimum penalty of $100 and a maximum of $2,500. The penalty applies for each return that must be filed.
The new rules also impose a significant additional gross negligence penalty in cases where a failure to file a return was made knowingly or due to gross negligence. The additional penalty is five percent of the maximum value of property held by the trust during the relevant year, with a minimum penalty of $2,500. This penalty would also apply to false statements and omissions amounting to gross negligence as well as a failure to respond to a CRA demand to file.
Within the Comox Valley, Landreville, Ives, and the lawyers at RLR Lawyers in the Riverwalk Center on Cliffe Avenue is one option for assistance. They frequently advise clients on restructuring and estate planning which may reduce trust and other reporting requirements, and create more advantageous tax, financial and estate planning consequences.