Andrew Coates, Associate, Gowling WLG (Canada) LLP

Today was supposed to be the due date for untold numbers of T3 returns and Schedule 15s for trusts known as “bare” trusts in existence on December 30, 2023. Not only was it going to be the first year that the Canada Revenue Agency (the “CRA”) required bare trusts to report their existence through the filing of a T3 return, but also the first year of the brand new Schedule 15 required for all trusts (bare or otherwise) to disclose beneficial ownership information.

However, at the proverbial 11^th hour, late on Thursday afternoon before the start of a holiday long weekend the CRA released a short statement advising that bare trusts are actually exempt from filing T3 returns and Schedule 15s for the 2023 tax year on the basis that “…the new reporting requirements for bare trusts have had an unintended impact on Canadians.”[i]

Tax professionals throughout the country might use different adjectives to describe the impact on our clients. We have been fielding calls for months from anxious and confused clients wanting to know the answer to the question: is this a bare trust?

The Income Tax Act (Canada) (the “ITA”) does not define a bare trust. The guidance on the CRA website for the new reporting requirements for trusts explains a bare trust for income tax purposes as “… a trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries of the trust with respect to all dealings with all of the trust’s property.”[ii] Well, that is as clear as mud for the majority of Canadians who have not taken a trust law course (and maybe even a few lawyers who have blocked out 1L Property!)

Notwithstanding the fact that Technical Information Bulletin B-068 applies for the purposes of the Excise Tax Act (Canada) and not the ITA explicitly, it provides one of the most comprehensive discussions of trust and agency relationships by the Department of Finance Canada. It notes the distinguishing factors between a bare trust and a “true trust” are whether:

1. the sole duty of the trustee is to convey legal title to the trust property on demand by and according to the instructions of the beneficial owner; and
2. the trustee has any independent power, discretion or responsibility pertaining to the trust property.[iii]

If the trustees have discretion to deal with the trust property without taking instruction from anyone else (i.e. the “beneficial owner”), then it is unlikely to be a bare trust. The distinction is important because bare trusts are treated differently under the ITA which is typically concerned with dispositions of beneficial interests and not legal title.

To determine whether a bare trust or true trust relationship exists, the CRA is (was) requiring the trust documentation be submitted with the T3 return.  In the absence of trust documentation, the CRA required the filer to submit a written summary of the trust relationship.

While CRA’s last minute, 180 degree turn with respect to the delay for bare trust reporting and disclosure is frustrating for everyone who has already taken steps to comply, the silver lining is there is now additional time to properly review the details of potential bare trust relationships. If the relationship is unwritten or unclear, consider putting a proper bare trust agreement in place to sufficiently answer both the client’s and CRA’s question: is this a bare trust?

[i] Canada Revenue Agency, News Release, “New – Bare trusts are exempt from trust reporting requirements for 2023” (28 March 2024), online: <canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2024/bare-trusts-exempt-from-trust-reporting-requirements-2023.html>

[ii] Canada Revenue Agency, “New reporting requirement for trusts: T3 returns filed for tax years ending after December 30, 2023” (28 March 2024), online: <canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html#toc1>

[iii] Canada Revenue Agency, “GST/HST Technical Information Bulletin B-068” (20 January 1993), online: <canada.ca/en/revenue-agency/services/forms-publications/publications/b-068/bare-trusts.html>