Taxpayers who have — or may have — bare trusts can breathe a sigh of relief.
The Canada Revenue Agency (CRA) will not impose gross negligence penalties on taxpayers who fail to file a return for a bare trust on time except in “the most egregious cases” for 2023, the first year in which new expanded trust reporting rules apply.
The CRA’s updated guidance, issued Tuesday, comes three weeks before the April 2 deadline for the filing of 2023 trust returns.
A bare trust exists when a trustee’s only duty is to transfer property to a beneficiary on demand. However, the CRA has not indicated whether even common structures are bare trusts, leading to confusion among financial advisors, their clients and ordinary people, said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S.
“If my parents are getting older and they put my name on the deed to their property, to their principal residence, is that a bare trust? We think the answer is yes, but the CRA hasn’t provided an answer yet,” Oakey said. “If my kids inherit money from their grandparents, and I put it in trust for them because they’re minors, we think that’s a bare trust, but the CRA hasn’t provided any guidance yet.”
The CRA’s updated guidance said a bare trust for income tax purposes “is a trust arrangement under which the trustee can reasonably be considered to act as an agent for all beneficiaries under the trust with respect to all dealings with all the trust property.”
One example of a bare trust given by the CRA is when a property developer holds registered title to real property for privacy reasons, while the developer retains beneficial ownership of the property.
As for the penalty relief, the CRA had already stated in December that it wouldn’t apply penalties — $25 per day late, with a minimum of $100 to a maximum of $2,500 — for filing a trust return and a Schedule 15 for bare trusts after the deadline.
However, the CRA also said at the time that if the failure to file was done knowingly or due to gross negligence, the agency could apply a penalty of $2,500 or 5% of the fair market value of the property held by the trust, whichever is greater.
Tuesday’s guidance limits the gross negligence penalty to “the context of a compliance action, such as an audit, where all factors and circumstances of the taxpayer’s situation are considered together.” Any application of a gross negligence penalty would be referred to CRA headquarters for oversight and approval, the agency said.
The CRA’s decision will be welcome relief for taxpayers who know they have a filing requirement but were struggling to understand the filing rules, said Aaron Hector, private wealth advisor with CWB Wealth in Calgary.
“There was fear that CRA might say, ‘You knew enough to know that you should have filed [a return] and you didn’t,’ and apply a gross negligence penalty,” Hector said. “It left the door open for people not to really know where they stood.”
The expanded relief from penalties will provide “more comfort for those who are still trying to verify whether or not they do indeed have a filing obligation,” Hector said. “They don’t need to rush into a filing until they know for sure it is necessary.”
CPA Canada also cheered CRA’s announcement. The organization had asked the CRA to expand relief for bare trust filers to address, in part, the additional reporting burden this filing season, Oakey said.
“There’s a massive volume of trust returns that have to be filed and accountants do not have the bandwidth to get these all done,” Oakey said. “It will not happen on time.”
The CRA has said the relief from penalties will apply for 2023 and only for bare trusts, as opposed to other trusts, as “the CRA recognizes that the 2023 tax year will be the first year that bare trusts will have a requirement to file a T3 return including the new Schedule 15.”
The CRA did not provide a time limit for the administrative relief from penalties for bare trusts in 2023. However, the filing requirement for 2023 and subsequent years for trusts, including bare trusts, remains.
How did we get here?
The federal government first proposed stricter trust reporting rules in the 2018 federal budget to help combat “aggressive tax avoidance, tax evasion, money laundering and other criminal activities” and as part of Canada’s international commitment to the transparency of beneficial ownership.
The expanded trust reporting rules were originally meant to be effective for the 2021 tax year, but the effective date was delayed twice, pending the passage of enabling legislation late in 2022. The new legislation is effective for trusts with year-ends on Dec. 31, 2023, and after.
Under previous legislation, generally only trusts with taxes payable for the year or those that disposed of capital property needed to file an annual trust income tax return (T3).
Under the expanded reporting requirements, express trusts (as opposed to those created by law) as well as bare trusts had to file a T3: Trust income tax and information return and a Schedule 15: Beneficial Ownership Information of a Trust with the CRA on an annual basis.
The new rules require trusts to identify all beneficiaries, trustees, settlors and/or protectors of the trust, including their address, date of birth and taxpayer identification number, such as a social insurance number.
Certain trusts are excluded from the expanded rules. These include: graduated rate estates; qualified disability trusts; mutual fund trusts and registered plans; trusts in existence for less than three months; and trusts with less than $50,000 in asset value — if those assets consist only of cash and securities traded on a designated exchange (and other certain assets).
In addition to the existing penalty for failing to file a T3 return on time — $25 a day, with a minimum penalty of $100 and to a maximum of $2,500 — the new reporting rules introduce an additional penalty for deliberately not filing or for gross negligence: $2,500 or 5% of the property’s value, whichever is greater.
The deadline for filing a T3 return is 90 days after the trust’s year end. For trusts with a 2023 calendar year end, the deadline for filing the return is March 30, 2024. However, as that’s a Saturday and April 1 is Easter Monday, the CRA said it will consider the T3 return to be filed on time if the agency receives it, or it’s postmarked, by Tues., April 2.