Many more Canadians will have to file a trust tax return this year than in the past. What is a bare trust, and what are their tax filing requirements?
Ask MoneySense
I would like some clarification on the T3 tax return for the year 2023. Whom does this rule apply to and can you clarify whether all the persons on the account have to complete T3 tax returns?
—Chander
What is a bare trust?
The Income Tax Act does not specifically define a bare trust, Chander. The Canada Revenue Agency (CRA) says: “A bare trust for income tax purposes is a trust arrangement under which the trustee 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.”
Essentially, a bare trust may exist when someone holds legal title to an asset, but some or all of the asset technically belongs—meaning it beneficially belongs—to someone else. Unlike formal trusts that are generally established with a lawyer, a bare trust is informal and can result simply from adding someone’s name to an account or to the ownership of a real estate property.
Common bare trust situations
Some common examples of bare trusts are:
- a parent co-signing a mortgage for their child and going on the title
- a parent or grandparent who has an account for a minor child or grandchild
- an adult child with joint ownership of their parent’s bank account, investments or real estate for estate planning purposes
Who has to file a trust tax return?
The trustees of the trust need to file a tax return for it. The trustees are the people who hold title to the assets on behalf of others. So, in the case of a parent co-signing a mortgage, it is the parent who needs to file. In the case of an account for a minor child or grandchild, it is the parent or grandparent who owns the account. In the case of an adult child who holds assets jointly with their elderly parent, it is the child who needs to file.
Certain trusts with assets under $50,000 may not be required to file.
Required tax filings
Bare trusts are required to file T3 Trust Income Tax and Information Returns for the 2023 tax year. A bare trust may not need to submit as much information as other trusts. The CRA has provided this guidance (see section 3.3) to Canadians:
Step 1: Identification and other information
- When using our online services, identify the type of trust as Bare Trust by selecting “code 307, Bare Trust” and provide the trust creation date in the appropriate field.
- If this is the first year of filing a trust return, send us a copy of the trust document, unless such information or document has been previously submitted. See 5.3 for more information on what documents may be required.
- Where applicable, provide a response and information related to whether the trust is filing its final return (and if so, provide the date on which the trust has been terminated or wound up in the year). Provide a response and information related to applicable questions on page two.
Step 5: Summary of tax and credits
- Complete the last page including the parts “Name and address of person or company who prepared this return” and “Certification.”
For bare trusts, the remaining parts of the T3 Return can be left blank. All income from the trust property for a taxation year should be reported on the beneficial owner’s return of income.
Complete all parts of Schedule 15.
Choosing a name for the trust
A trust must have a name so it can be identified by the CRA. The CRA gives this example: For a bare trust for which “Ms. Andrews” is the beneficiary, a name like “Ms. Andrews trust” may be appropriate. If there are multiple beneficiaries, the CRA suggests putting the names in alphabetical order based on last name, with the word “trust” at the end.
How to get a CRA trust number
A trust also needs a trust number. This number is similar to a social insurance number in that it helps the CRA identify the taxpayer—which in this case is the trust.
According to the CRA, the simplest method to obtain a trust number is to use the newly introduced “Trust Account Registration” service online. The service is available:
- Under the “More services” option in My Account
- Under the “More services” option in My Business Account
- Under the main menu in Represent a Client
What happens if you file late?
Penalties of $25 per day, up to a maximum of $2,500, normally apply for filing a trust tax return late.
The returns are due within 90 days of year-end. For the 2023 tax year, a T3 return for a bare trust is due April 2, due to March 30 falling on a holiday weekend. The CRA has said it will waive penalties for late filing for the 2023 tax year only.
Underused housing tax returns
The underused housing tax (UHT) rules introduced for 2022 may cause bare trusts to have to file both T3 Trust Income Tax and Information Returns and UHT-2900 Underused Housing Tax Returns. A trust that owns residential real estate needs to file the UHT return to claim an exemption from the underused housing tax.
What the rule changes mean for Canadians
Canadians with bare trusts that may have had no accounting or legal requirements in the past suddenly have to submit one or more annual tax filings to the CRA. The new rules are confusing to the tax community, Chander, so I can understand how you as a taxpayer must feel.
The CRA is taking an educational approach for the 2023 tax year by waiving penalties for these trust tax returns. But it is important to get up to speed on your own or using a professional to make sure you stay compliant going forward.