If you are a bare trustee in Canada, you might have heard about some changes to the filing requirements with Canada Revenue Agency (CRA). These changes are important to understand to ensure compliance and avoid penalties. Fortunately, CRA has delayed the start of these new filing requirements for one year.  They have not cancelled – they have only delayed for one year.  Let’s break down what these changes mean for you.

First, let us clarify what a bare trustee is. A bare trustee is someone who holds either partial or full legal title to assets when they are not the actual or beneficial owner. They act on behalf of another party, known as the beneficiary, who has the right to the assets. Common examples of bare trustees include parents on title to real estate for their children or children holding a joint bank account or real estate for their aging parents.  Another example is holding assets for a friend or relative who is working overseas for several years.

Until now, since bare trustees have no beneficial interest in the property, they were not required to file any tax returns. The CRA has implemented changes regarding the reporting obligations for bare trustees. These changes aim to enhance transparency and ensure that all relevant information about trusts are accurately reported for tax purposes.

One significant change is the introduction of the T3 Trust Income Tax and Information Return. This form must be filed by bare trustees for each trust they manage, even if the trust has no income. It includes details such as income earned, deductions claimed, and distributions made from the trust during the tax year. By requiring bare trustees to file this form, the CRA can better track the income generated by trusts and ensure that taxes are paid accordingly.  Additionally, bare trustees are now required to provide certain personal information about the trust beneficiaries to the CRA. This information helps the CRA verify the identities of the beneficiaries and ensure they are correctly reporting any income they receive from the trust on their own tax returns.

Failing to file the T3 Trust Income Tax and Information Return or provide accurate beneficiary information can result in fines or other enforcement actions by the CRA.  The minimum penalty is $2,500 per year for each year the bare trustee does not file the required T3 return.

If you are unsure about how these changes apply to you as a bare trustee, we recommend you seek guidance from a tax professional or legal advisor. They can help you understand your obligations and ensure that you meet the CRA’s requirements.  Please make sure you do this well in advance of next year’s filing deadline.

The most effective method to avoid this entire requirement is the use of a Power of Attorney.  This can be a regular Power of Attorney or an Enduring Power of Attorney (still effective if the beneficial owner is incapacitated).  The Attorney has full and complete legal authority to act on behalf of the donor without ever becoming a bare trustee and dealing with all the new tax requirements.  A Power of Attorney is extremely flexible as it typically covers all the assets owned by the donor. It can also be modified to only cover certain assets.

In summary, the new CRA filing requirements for bare trustees aim to improve transparency and ensure that all income is accurately reported. It adds new paperwork and complexities along with potential fines and penalties.  In most cases, a Power of Attorney is a more effective alternative and avoids all the new CRA paperwork.