There will be no repeat of the mass confusion experienced earlier this year by people trying to comply with the federal government’s new requirement to report details on bare trusts.
As ever where bare trusts are concerned, the government was operating in quiet mode earlier this week when it released changes to bare-trust reporting rules. A lack of clear information turned the introduction of bare-trust reporting into a fiasco earlier this year. Bare trusts 2.0 is a happier story.
“The government has proposed a number of changes to the bare-trust reporting rules which should significantly reduce the number of individuals who were affected by these rules,” says a summary of the changes from Pam Prior, KPMG’s national leader in the area of estates and trusts for tax and family office.
“This means fewer individuals will need to report to the CRA under these revised trust reporting rules.”
In response to the mystification caused by the initial bare-trust reporting rules, the Canada Revenue Agency earlier this year said it would not require people to file information on these trusts for the 2023 tax year. Ms. Prior said the government has confirmed that a T3 Trust Income Tax and Information Return will not have to be filed for bare trusts in the current year, either. The new rules for bare trusts apply to the 2025 tax year.
Bare trusts are financial arrangements where one person is a beneficiary, and another is a trustee who manages things. This could include people who are joint holders of bank or investment accounts with their parents, and were added to help run the accounts. Also, situations where parents are joint owners of a home with a child to help with qualifying for a mortgage.
Bare trusts with assets of $50,000 or less were exempt before, provided they held certain types of assets. Ms. Prior said trusts of this size can now hold any type of asset and still be exempt.
There’s also a new exemption for “related party trusts,” which means each trustee must be an individual, and each beneficiary must be an individual who is related to the trustee. The exemption applies to trusts with property valued at $250,000 or less, provided they hold certain types of assets.
Allowable assets include publicly traded stocks and mutual funds, guaranteed investment certificates, bonds and personal use property. Ms. Prior said undistributed income such as dividends or mutual fund distributions will no longer disqualify the trust’s exemption.
Personal-use real estate, such as principal residences and cottages worth more than $250,000, would not qualify for the related-party exemption, Ms. Prior notes. However, another new exemption would apply if the legal owners of a property are related individuals, and the property could be designated as the principal residence of a legal owner. There’s no threshold on the value of the real estate.
Ms. Prior said this would exempt an adult child added as a title holder to a parent’s principal residence, or a parent added as title holder on a child’s principal residence to help the child qualify for a mortgage.
Changes to the bare trust rules are contained in a technical Department of Finance document titled Legislative Proposals Relating to the Income Tax Act and the Income Tax Regulations. The lack of a more formal announcement to update individual taxpayers is in keeping with strange sense of detachment the government has exhibited on bare-trust reporting.
The requirement to report bare trusts were part of government efforts to reduce tax evasion and money laundering – a laudable goal. But complying was so impenetrably technical that many tax filers had to consult accountants or tax preparers at considerable expense.
My colleague, Erica Alini, reported in April on survey results suggesting accountants and clients may have spent close to $1-billion trying to comply with the bare-trust reporting rules. That was before the CRA announcement that reporting requirement would be suspended for the 2023 tax year.
Ms. Prior said in an interview that she was unaware of anything in the latest information on bare trusts that addressed the confusion and costs to date of complying with reporting rules.
“The nice thing is that we’ve got an additional year to work our way through the rules and ensure that taxpayers and their advisers understand them,” she said.
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