Bare trusts are getting a reporting reprieve.
Beneficiaries of this common form of trust (and their lawyers) will be breathing a sigh of relief after the Canada Revenue Agency announced it was exempting them from its new trust reporting requirements for the 2024 tax year.
Bare trusts allow beneficial owners to retain ownership and control over a property while someone else holds the legal title and are frequently used by testators who want to minimize the probate tax payable on the transfer of a home or cottage to a beneficiary, without the hassles and risks that come with holding property jointly with that person during their lifetime.
Many estates and trust law practitioners were surprised that bare trusts were included at all under the new reporting rules, which already apply to other types of trust, requiring them to file a T3 tax return that identifies the trustees, beneficiaries and settlors of the trust. Historically, most trusts were able to avoid annual tax filing requirements, because T3s were only needed when trusts owed tax or made distributions to beneficiaries.
Bare trusts were originally supposed to begin reporting for the 2023 tax year, but the federal government backtracked in March – just days before the filing deadline as taxpayers and their advisors scrambled to meet their obligations. According to Global News, the federal taxpayers’ ombudsman is currently investigating the saga, with a report due in early 2025.
When (or if) the new trust rules are finally extended to cover bare trusts, trustees will have good reason to take their reporting obligations seriously. Penalties for non-compliance accumulate at a rate of $25 per day up to a maximum of $2,500. The fines jump significantly when false statements in the document or the failure to file were done knowingly or as a result of gross negligence: then the penalty is calculated as the greater of $2,500 or 5% of all assets in the trust.
The obligations these new rules impose on trusts are relatively onerous – especially compared with the status quo – and some people may prefer to wind up their existing trust arrangements if privacy was a key feature for them, or if they will struggle to get all the necessary information together in time to comply.
Whether you already have trusts in place as part of your existing estate plan or you’re thinking of setting them up, an experienced estates lawyer can help you assess your options and meet your reporting obligations.
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