Recent Updates with Bare Trust Reporting Requirements

Over the past year, the Department of Finance and the CRA have introduced Bare Trust reporting requirements, which, before years ending December 31, 2023, was not a thing.

We also got to experience a great load of ambiguity and confusion as to who and what was considered a Bare Trust and if a taxpayer needed to file a trust return. Then, on March 28, 2024, just days before the Trust Deadline, the CRA stated that Bare Trusts are exempt from the trust reporting requirements for 2023.

Well, 2024 is another tax year, and Finance has released draft legislation in hopes of providing more guidance.

What is a Bare Trust

The Income Tax Act added a definition for Bare Trust which “includes an arrangement under which a trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.” Well, what does that mean?

A bare trust is generally when an arrangement is in place where a person holds legal title to the property but lacks decision-making authority over it. The beneficiary maintains full control and beneficial ownership. A common example is when a construction company owns a piece of land in a bare trust company, for the use of another.

Despite its apparent simplicity, the absence of a precise definition has created uncertainty regarding which arrangements qualify as bare trusts, such as when a child is on title to their elderly parent’s bank account. Another example is when a parent is on the title for a house that is owned and used by their child to help the child get approved for a mortgage.

Recent Developments

Following extensive deliberation, the Department of Finance has announced several changes to the reporting requirements for bare trusts:

The legislation introduces the concept of “express trusts” for reporting purposes, encompassing certain beneficial ownership arrangements not traditionally considered trusts.
The wording effectively excepts situations where a person is listed on title but has no effective control or use of the property
Finance then added a further series of exceptions:

- A person is a legal owner, and there are no legal owners that are not beneficiaries;

- All the legal owners are related, and the property would be a principal residence of one or more if it were so designated (the designation only gets made upon sale);

- The legal owner is an individual and the property held for the benefit of that individual’s spouse or common-law partner, and it would be a principal residence of the legal owner if it were so designated;

- All is true:

The property is held solely for the use or benefit of a partnership,
Each legal owner is a partner (other than a limited partner), and

iii. The partnership is required to file a return for the calendar year;

- The legal owner holds the property pursuant to a court order;

- The property is a Canadian resource property and held for use by a publicly-traded entity; or

- The property is held for the use of a government-funded tax-exempt entity.

The proposed legislation also expands the scope of trusts exempted from reporting:

- Where each trustee is an individual, each beneficiary is related to each trustee, and the total fair market value of property does not exceed $250,000 throughout the year. For this exemption to apply, the property must be cash, GICs issued by a Canadian bank, publicly traded securities, a widely traded mutual fund interest, or similar type of asset.

Implications for Taxpayers

While the new legislation aims to provide clarity, complexities persist. It is crucial to carefully analyze whether your specific circumstances fall under the defined exemptions.