On August 12, 2024, draft legislative proposals were introduced by the Department of Finance that, among other things, are designed to clarify the bare trust reporting rules which came into force for the 2023 taxation year for most trusts. It is hoped that these changes, once enacted, will  significantly reduce the number of Canadians with bare trusts who need to file and will ease the related administrative burden.

The new legislative proposals will repeal the existing bare trust legislation and replace it with updated legislation applicable to the 2025 and subsequent taxation years.

For 2024, the existing bare trust legislation remains in effect. However, on October 29 2024, the Canada Revenue Agency (the “CRA”) announced that bare trusts will not be required to file a return (including Schedule 15, Beneficial Ownership of a Trust) unless directly requested by the CRA.  This is a continuation of  the administrative exemption announced by the CRA for the 2023 taxation year.

Do I have the kind of bare trust contemplated in the legislation?

The draft legislation does not explicitly use the term “bare trust.”  For that matter, the existing legislation does not either.  However, the draft legislation provides greater clarity regarding what is caught by the reporting obligations.

The convoluted reasoning stems from the basic obligation to file a trust tax return (T3) – or more specifically, the basis on which many trusts did not file a trust tax return. If a trust has no tax payable in a given year, it is not required to file a return.  Thus, if a trust has no income in a year, the general position was that it was not required to file a return.  However, a trust (resident in Canada) that disposes of capital property must file a return regardless of whether a capital gain is realized. 

A so-called bare trust is disregarded for income computation purposes and thus has no income.  However, when the trust reporting rules came into effect, even if a trust had no income in the year and did not dispose of capital property in the year, it was required to file a return unless a listed exemption applied.  Furthermore, arrangements under which the trust can reasonably be considered to act as agent for all beneficiaries under the trust concerning all deals with the trust’s property were explicitly brought into the reporting regime.  The listed exemptions, though limited, in any event) only applied to an “express trust.”  Further, the enhanced reporting requirements (Schedule 15,  Beneficial Ownership of a Trust) applied only to “express trusts.” 

The draft legislation uses a deeming rule to deem certain arrangements as “express trusts.”    If an arrangement that might colloquially be considered a bare trust meets the criteria of the deeming rule, then one can look to the exemptions from reporting available only to an “express trust” and determine whether the enhanced reporting (i.e., Schedule 15, Beneficial Ownership of a Trust) is required. 

Specifically,  under the draft legislation, an express trust is deemed to include any arrangement where:

  • one or more persons have legal ownership of property that is held for the use of, or benefit of, one or more persons or partnerships; and
  • the legal owner can reasonably be considered to act as agent for the persons or partnerships who have the use or benefit of the property.

The draft legislation further provides that a legal owner of property under such an arrangement would be considered a trustee, and each person or partnership with the use or benefit of the property under the arrangement would be considered a beneficiary of the trust.  Thus, bare trust arrangements fitting the foregoing criteria would be deemed express trusts, with the resultant consequences.

Does my bare trust need to report?

If a bare trust arrangement meets the above criteria so that it is deemed an express trust, it is excluded from the deeming rules if it falls into one of the following exceptions.  This means such arrangements are not required to report:

  • circumstances that result in a person holding property both for themselves and another person are excluded, such as a joint bank account;
  • situations where real property is held by an owner for a related person and the property could be designated as the principal residence of the owner, such as a parent being on title so their child can obtain a mortgage;
  • situations where two spouses occupy a home, but only one of them is on title who could designate the home as the principal residence;
  • circumstances where a partner, other than a limited partner, holds property for the benefit or use of a partnership;
  • a legal owner is holding property pursuant to a court order;
  • arrangements where Canadian resource property is held for the use or benefit of a publicly listed company, or companies, including their subsidiaries; and
  • arrangements where a non-profit organization receives funds from the government for the use or benefit of other non-profit organizations.

If none of the above exceptions apply, a bare trust arrangement deemed to be an express trust could look to the exemptions available to an express trust under the existing legislation, as amended by the draft legislation.  These exceptions notably include:

  • an express trust that has been in existence for less than three months at the end of the year;
  • an express trust that only held certain enumerated categories of property, such as cash and shares of publicly traded companies, with a fair market value that remained under $50,000.00 throughout the year (the draft legislation expands this exception to remove the enumerated categories so that any assets qualify, subject to the $50,000.00 fair market value limitation); and
  • a new exception introduced in the draft legislation for an express trust where each trustee is an individual, each beneficiary is an individual that is related to each trustee, and the assets held by the trust only consist of certain enumerated categories of property with a total fair market value remaining below $250,000.00 throughout the year. The enumerated categories of properties include cash, shares of publicly traded companies, debt obligations of public companies, GICs and personal use property, but do not include private company shares.

If any of these exceptions apply, a bare trust arrangement deemed to be an express trust is not required to report.

The above comments are based on draft legislation proposed to apply for 2025 and subsequent years, but it has not yet been enacted.   Further changes may still be forthcoming. Should you have any questions about bare trust reporting obligations, please feel free to reach out to a member of Miller Thomson’s Corporate Tax Group.