Published: April 16, 2024
Last Updated: April 24, 2024
Introduction: Bare Trusts & T3 Trust Reporting
Canadian income-tax law generally ignores a bare trustee, which means that the bare trustee need not report income generated by the trust property. But in December 2022, the Canadian federal government passed new legislation (Bill C-32) requiring a Canadian trustee of a bare trust to file an annual T3 trust income-tax return, starting with the 2023 taxation year. This legislation meant that most Canadian bare trusts would have needed to file an inaugural T3 trust return by April 2, 2024.
Yet on March 28, 2024, only days before this year’s deadline, the Canada Revenue Agency reversed course and announced that the CRA “will not require bare trusts to file a T3 Income Tax and Information Return (T3 return) […] for the 2023 tax year.” The Canada Revenue Agency revealed this decision in a news release, which explained that the choice was made “in recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians.”
Although the Canadian tax community welcomes the Canada Revenue Agency’s decision to suspend the bare-trust-filing requirement, the CRA’s last-minute notice and the government’s rollout of the bare-trust-filing requirement have left Canadian taxpayers and their advisors confused and frustrated.
It doesn’t appear that the CRA will cancel bare-trust reporting altogether. The Canada Revenue Agency’s news release noted that, “over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement.” Moreover, a bare trust must still file a 2023 T3 trust return if “the CRA makes a direct request for these filings.”
The CRA encouraged taxpayers to consult a Canadian tax lawyer to determine whether the 2023 bare-trust-filing exemption applied to them: “Whether or not an arrangement is a trust or a bare trust is dependent on the specific facts of each situation, as well as the applicable law. Taxpayers may wish to seek legal counsel if they are unsure whether their arrangement is a trust, and what type of trust they have.”
To assist taxpayers who may be confused about whether the 2023 bare-trust-filing exemption applies to them, this article discusses the differences between a trust and a bare trust. It also offers pro tax tips for Canadian taxpayers who have created or want to create a bare trust.
What is a Bare Trust?
The trust concept finds its roots in equity, a body of law developed in the English Court of Chancery and adopted by Canadian courts. Equity distinguishes legal ownership from beneficial ownership. A person legally owns a property if his or her name is on title, yet the beneficial owner is “the real owner of property even though it is in someone else’s name.” (Csak v Aumon, [1990] 69 DLR (4th) 567 (Ont. HCJ), at p. 570.)
A trust, then, is a relationship between a trustee, a beneficiary, and a property. And it depends on the distinction between beneficial and legal ownership: the trustee legally owns the property; the beneficiary (unsurprisingly) beneficially owns the property.
The trust’s creator (also known as the settlor) will often burden the trustee with duties to maintain or manage the trust property in the beneficiary’s favour. For instance, the settlor might require that the trustee manage a large sum of money, cryptocurrency, or non-fungible tokens for a child or disabled beneficiary.
A bare trust, however, is a trust in which the trustee has no obligations other than to dispose of the trust property in compliance with the beneficiary’s directions. In other words, under a bare trust, the beneficiary retains complete control over the trustee’s dealings with the trust property.
As such, a bare trust is primarily an agency relationship whereby the bare trustee holds title to property as the beneficiary’s agent. An agency relationship exists where parties agree that one person (the agent) shall act in accordance with the directions of the other (the principal). Hence, a bare trust arises when parties agree that one person (the bare trustee) shall act in accordance with the directions of the other (the beneficiary) with respect to a property (the trust property). The trust property is, of course, the property over which the beneficiary enjoys true ownership but to which the bare trustee holds legal title.
How Do I Determine Whether a Bare Trust Has Been Created?
As with a conventional express trust, a bare trust must exhibit the so-called three certainties: (1) certainty of intention, (2) certainty of subject, and (3) certainty of object. The certainty-of-intention requirement deals with the settlor’s intention to create a trust, and this requirement demands that the settlor demonstrate an intention to create a trust by obligating the trustee to hold a property for the beneficiary’s benefit. The certainty-of-subject requirement deals with the property that the settlor intends to put in trust, and it demands three things. First, the settlor must own the property—at least beneficially—that the settlor intends to put in trust. Second, the trust property must be ascertainable when the trust comes into existence. Third, each beneficiary’s entitlement to the trust property must be sufficiently defined. Finally, the certainty-of-object requirement deals with the trust’s beneficiary or beneficiaries. Under this requirement, it must be possible to ascertain each beneficiary (if the trust is a fixed trust) or to determine the beneficiary status of a given individual (if the trust is a discretionary trust).
But the principles of agency law also prove relevant in a bare-trust relationship. This is because a bare trust is essentially a principal-agent relationship in which the agent holds legal title to property that the principal beneficially owns. Hence, the principles that discern whether parties have entered an agency relationship also bear upon whether parties have created a bare trust.
An agency relationship may emerge in one of two ways: First, it may arise by agreement between the principal and agent. Their agreement may be express, or it may be implied by the conduct or situation of the parties. Second, an agency relationship may retrospectively emerge by the principal’s subsequent ratification of acts done on his behalf.
The essential ingredients of an agency relationship are that (i) the principal and agent must both consent, (ii) the principal has given the agent the authority to affect the principal’s legal position, and (iii) the principal retains control over the agent’s actions.
The parties need not have reduced their agency agreement to writing. If no written agency agreement exists, the parties’ conduct determines whether they intended to create an agency relationship. The key feature is the level of control that the alleged principal exerts over the alleged agent. Notably, in an agency relationship, the principal retains beneficial ownership of any property subject to that relationship. Hence, when an agency relationship calls for the agent to acquire the principal’s property, a bare trust potentially arises: If the agent acquires the principal’s property with the sole responsibility of carrying out the principal’s instructions, the agent holds that property as a bare trustee while the principal enjoys the rights associated with beneficial ownership—that is, the rights to use, possess, dispose of, earn income from, and destroy the property. If, on the other hand, the alleged agent need not accept the principal’s instructions on dealing in the property, or if the alleged agent has significant independent power, discretion, responsibility over the property, he is neither an agent nor a bare trustee.
Therefore, when parties haven’t recorded their agreement in a written legal instrument, a number of factors speak to whether the parties have created a bare trust with respect to a property. Relevant questions will include the following (amongst others):
- Does the purported bare trustee deal in the alleged trust property without the purported beneficiary’s direction or permission?
- Does the purported bare trustee derive any personal benefit from the alleged trust property?
This determination calls for a detailed legal analysis of the parties’ arrangement in light of the principles governing agency and bare-trust relationships. So, if you need to determine whether a certain arrangement qualifies as a bare trustee, please consult one of our experienced Canadian tax lawyers.
Pro Tax Tips: Canadian Tax Treatment of Bare Trusts & The Importance of a Written Bare-Trust Agreement
Canada’s income-tax law ignores the bare trustee. Although subsection 104(2) of Canada’s Income Tax Act deems a trust to be an individual for income-tax purposes, this deeming rule doesn’t apply to “an arrangement under which the trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property” (see: subsection 104(1)). As a result, if a person retains beneficial ownership of a property while transferring legal title to a bare trustee—e.g., by putting the trustee’s name on title for a real property—the transaction does not constitute a disposition for income-tax purposes, and the settlor does not thereby trigger capital-gains tax.
Subsection 104(1) of Canada’s Income Tax Act also deems a bare trust to not be a trust for income-tax purposes. This means that the bare trustee needn’t report the income generated by the trust property; that income belongs to the beneficiary, who must report it and pay tax on it. And if, in accordance with the beneficiary’s directions, the bare trustee sells some or all of the bare-trust property to a third party, the transaction is taxed as though the beneficiary had dealt directly with the third party. That is, the beneficiary must report the resulting gain or loss. (The resulting gain or loss will be reported either on capital account or on income account, depending on the facts surrounding the transaction.) Likewise, a bare trust isn’t subject to the 21-year deemed-disposition rule under subsection 104(4) of Canada’s Income Tax Act. So, the bare trust isn’t forced to realize all accrued capital gains for income-tax purposes every 21 years.
For the most part, the GST/HST treatment of bare trusts reflects the income-tax treatment. That is, courts will generally ignore a bare trust when applying the provisions of Canada’s Excise Tax Act. But there is at least one important exception: A bare trustee isn’t ignored for the purposes of the GST/HST New Housing Rebate. In The Queen v Cheema, 2018 FCA 45, a majority of the Federal Court of Appeal held that a new-home purchaser cannot claim the GST/HST New Housing Rebate if a co-signer of the purchase agreement doesn’t also occupy the home—even if the co-signer acted as a bare trustee for the purchaser’s benefit.
Thus, while Canadian tax law typically ignores bare trusts, this treatment isn’t universal. The lesson is that, before entering a bare-trust relationship, you must first confirm that the bare trust will indeed bring about the desired tax consequences in your particular circumstances. For tax guidance concerning bare trusts, speak to one of our expert Canadian tax lawyers today.
As mentioned above, the creation of a bare trust does not require a written agreement. The parties’ conduct is what determines whether they intended to create a bare trust.
That said, if parties intend to create a bare trust, they should execute a written bare-trust agreement. Likewise, parties who have already entered into an oral bare-trust agreement should memorialize that pre-existing bare-trust relationship by executing a written bare-trust agreement. While the bare-trust agreement is itself distinct from the document recording that agreement, the Canada Revenue Agency will likely dispute the existence of a bare trust without documentary evidence.
Not only can our knowledgeable Canadian tax lawyers provide tax guidance about tax-planning opportunities involving bare trusts, but they can also draft a bare-trust agreement containing the clauses that you require.
Frequently Asked Questions
I’m the Canadian trustee of a bare trust. Do I need to file a T3 Trust Income-Tax Return and Schedule 15 (Beneficial Ownership Information of a Trust) for the 2023 taxation year?
Currently, no. But you’ll need to do so if the CRA requests them from you directly. On March 28, 2024, the Canada Revenue Agency reversed course and announced that the CRA “will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request for these filings.”
Has the Canada Revenue Agency now cancelled the T3 filing requirement for bare trusts?
No. The CRA has suspended bare-trust reporting for the 2023 taxation year only. It doesn’t appear that the CRA will cancel bare-trust reporting altogether. The Canada Revenue Agency’s news release noted that, “over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement.” Moreover, a bare trust must still file a 2023 T3 trust return if “the CRA makes a direct request for these filings.” It seems that the Canada Revenue Agency plans to reinstate this filing requirement eventually. Consult with one of our top Canadian tax lawyers to ensure that you’re aware of new developments.
What is a bare trust?
A bare trust is a trust in which the trustee has no obligations other than to dispose of the trust property in compliance with the beneficiary’s directions. In other words, under a bare trust, the beneficiary retains complete control over the trustee’s dealings with the trust property. As such, a bare trust is primarily an agency relationship whereby the bare trustee holds title to property as the beneficiary’s agent. An agency relationship exists where parties agree that one person (the agent) shall act in accordance with the directions of the other (the principal). Hence, a bare trust arises when parties agree that one person (the bare trustee) shall act in accordance with the directions of the other (the beneficiary) with respect to a property (the trust property). The trust property is, of course, the property over which the beneficiary enjoys true ownership but to which the bare trustee holds legal title.
What are the tax advantages of employing a bare trust?
The tax advantages of a bare trust generally stem from the principle that Canada’s tax law typically ignores a bare trustee. For example, if a person retains beneficial ownership while transferring legal title to a bare trustee, the transfer does not constitute a disposition. As a result, by directing a bare trustee to acquire and deal with his property, the beneficiary does not thereby trigger a taxable event for himself. Moreover, the bare trustee needn’t report the income generated by the trust property; that income belongs to the beneficiary, who must report it and pay tax on it. These features may prove particularly attractive for estate-planning purposes—e.g., avoiding probate tax without triggering unwanted income-tax liability. Still, while Canadian tax law typically ignores bare trusts, this treatment isn’t universal. For example, a bare trustee isn’t ignored for the purposes of the GST/HST New Housing Rebate (see: The Queen v Cheema, 2018 FCA 45). So, before entering a bare-trust relationship, you should first confirm that the bare trust will indeed bring about the tax consequences that you seek. Consult one of our knowledgeable Canadian tax lawyers today for tax guidance concerning bare trusts.
I believe that I’m the beneficiary of a trust. How do I know whether this trust is a bare trust?
This determination calls for a detailed legal analysis of the parties’ arrangement in light of the principles governing trusts and those governing agency relationships. So, if you need to determine whether a certain arrangement qualifies as a trust or a bare trustee, please consult one of our experienced Canadian tax lawyers.
DISCLAIMER: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.
Disclaimer:
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."
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