Question asked by Sumit Khanna
My son owns a house where he lives. He was having a hard time getting a mortgage. I decided to be on the title of the property to help him secure his first house in Canada. Do I need to file a trust tax return now?
Disclaimer: This is not tax advice. The answer below is for general purposes. Please exercise caution while making any decision based on this post or any other post on this website. This question may have been rephrased to correct some of the technical terms. The rephrased questions are often more helpful to a wider range of readers.
Bare Trust Reporting is Required!
The arrangement mentioned by you points to the existence of a bare trust. Yes, based on the new extended and expanded reporting requirements for the trusts, you will have to file a trust tax return in Canada.
What is a Bare Trust in Real Estate Transactions?
A bare trust is an arrangement where the legal title of a property is held by one entity (the trustee). Still, all the benefits and responsibilities of ownership fall to another entity (the beneficial owner).
This arrangement allows the beneficial owner to control and manage the property, reap any financial gains from its use or sale, and remain responsible for all related obligations, such as taxes and debts, while the trustee holds title to the property without any real powers or duties beyond following the beneficial owner’s instructions.
Given the housing market in major cities of Canada, for example Toronto, it is becoming increasingly difficult for younger population to get a mortgage. Many times parents lend the helping hand by borrowing the down payments or even adding themselves to the title of the property. This creates a bare trust!
Besides, bare trusts are sometimes used for privacy, as the legal title holder (trustee) appears in public records, concealing the identity of the actual owner (beneficial owner). They’re also employed for tax planning and simplifying transactions, such as avoiding probate or land transfer taxes under certain conditions.
In real estate, a developer might use a bare trust to hold the title of a development property, keeping the developer’s involvement private and potentially offering some tax advantages. Despite the trustee holding the title, all rights and obligations related to the property lie with the beneficial owner, who directs how the trustee should act concerning the property.
New: Bare Trusts must file T3
Previously, bare trusts were not subject to trust filing requirements in Canada.
With the new reporting requirements in Canada, these trusts now have to be more transparent in their dealings, especially in disclosing the details of trustees, beneficiaries, and other related parties in their annual T3 Trust Income Tax and Information Return filings.
These reporting requirements are effective for tax years ending after December 30, 2023, introduce mandatory annual T3 Trust Income Tax and Information Return filings for these trusts.
There are some exceptions for specific situations though!
Due Dates and Penalties
The due dates for these filings are critical: the T3 Return and the accompanying Schedule 15 must be submitted within 90 days following the end of the trust’s tax year. For most bare trusts, this will generally mean by the end of March following the tax year in question. (April 2nd for 2023 tax years).
With inclusion of Bare Trusts the government has casted a wider net. Regarding penalties, the new rules are stringent. If a bare trust fails to file as required, it faces a late-filing penalty of $25 per day, with a minimum of $100 and a cap at $2,500. More severe penalties may apply for gross negligence or intentional failure to comply, with potential fines based on a percentage of the trust’s asset value.
These changes underscore the importance for trustees involved in real estate and other sectors to acquaint themselves with the new requirements to ensure timely compliance and avoid the substantial penalties for non-compliance.
