Navigating Bare Trust Obligations

In 2023, there are new rules to be aware of regarding mandatory tax filings for most types of trusts. Bare trusts (which, despite the confusing name, are not really trusts at all), are unfortunately captured by these new filing requirements.

What is a bare trust? It is essentially an agency relationship between one person or entity who agrees to hold property of some kind on behalf of another person or entity. For example, if a company owns a piece of real estate but, for privacy reasons, chooses to have the certificate of title registered in the name of a person, then this is essentially a bare trust. The duties of a bare trustee (also known as the agent) are to simply follow the instruction of the true owner. Another common scenario is where an adult child is listed as a joint account holder on their parent’s bank accounts, simply to help with the payment of bills. Though there are many reasons why we would not necessarily recommend this type of arrangement, our newest concern is that this bare trust now also has an income tax filing obligation.

Before this year, bare trusts were treated simply – for tax reasons, the true owner of the property dealt with all income tax matters related to the property. Now, the bare trustee has an obligation to file a T3 Trust Income Tax and Information Return each year, unless the bare trust falls into a very narrow list of exceptions. The vast majority of bare trusts will have mandatory filings.

In particular, all returns are due 90 days after the trust’s year end (in most cases, December 31). This means that in a non-leap year, the return is due on March 31 of the following year. While most bare trusts won’t have any tax to pay, there are significant penalties that can accrue if the return is not filed. Failure to file can attract a daily penalty of $25.00, plus additional penalties for negligence and non-compliance. These penalties can become very large, very quickly.

Please reach out to Duncan Craig LLP if you have any questions, and we would be happy to discuss this issue with you in greater detail. In particular, we urge all of our clients to contact their accountants to make sure that they are ready to file the necessary returns well before the deadline.

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