The Canadian Federal Government has made important changes to the Income Tax Act, newly requiring trustees – including trustees of bare trusts – to file a T3 Trust Income Tax and Information Return, for the tax year ending December 31, 2023, prior to the federal deadline (90 days after the trust’s year end date).
Prior to this change, many bare trusts were exempt from T3 filing requirements (but continued to have additional, separate requirements to file Transparency Reports under the Land Owner Transparency Act and UHT filings under the Underutilized Home Tax Act).
Bare Trusts in Real Estate
A bare trust occurs when the legal owner of an asset holds the property for the benefit of another person(s) or company(ies), called the beneficial owner or beneficiary; the trustee holds the property without any active duty to perform, except to convey the property on demand. Bare trust can be created for many types of assets, including real estate.
Bare trusts commonly occur with “family transfer” transactions but may also be created in conjunction with “standard” arms-length purchase transactions.
Examples of bare trusts in real estate:
- Parent(s) adding their child(ren) to their property title for estate planning purposes other than a direct gift. The intention is that, while alive, the parent remains the full beneficial owner of the property and, when the parent dies, the child is gifted the “right of survivorship” so that the property passes outside the parent’s estate and avoids probate. The child then holds the property for the benefit of the parent’s beneficiaries as named in their Will. Thus, the child is always a trustee, holding the title for the benefit of others (and sometimes themself as beneficiary too).
- Child adds parent(s) to their property title for the purpose of obtaining mortgage financing. The intention is that the property belongs to the child, but the bank requires a co-signor (as a borrower – not as a guarantor or covenantor) on the mortgage. A borrower cannot obtain financing over a property he does not own, so the parent needs to be added to title as a legal owner, but the understanding is that the child remains the sole beneficial owner of the property.
Bare trusts commonly occur with “family transfer” transactions but may also be created in conjunction with “standard” arms-length purchase transactions.
What does this mean for Trustees?
Trustees are advised to contact their accountant about T3 filing requirements and additional potential Underutilized Housing Tax (UHT) filing requirements as soon as possible.
Gathering necessary beneficiary, settlor and trustee information could be time-consuming and non-compliance with filing deadlines may result in significant fines.
