What is not a bare trust for tax purposes?

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Bare trusts have become a four-letter word for affected Canadians who must file a T3 trust tax return. Originally, April 2 was the filing deadline but the Canada Revenue Agency has now exempted filings for the 2023 taxation year.

Bare trusts include not just official trusts set up by a lawyer with a professional trustee but informal trust agreements clients may have established over the years. Examples may include in-trust accounts for minor children (ITFs), joint accounts between family members for estate planning purposes, co-signing a mortgage, or even a family member being added to the title to their parent’s or child’s property.

With ITFs, for example, “previously, no tax return was needed unless the child has investment income high enough to trigger taxes and warrant that tax filing,” says Brianne Gardner, financial advisor and co-founder of Velocity Investment Partners at Raymond James Ltd. in Vancouver.

Ms. Gardner has been conducting “deeper dives” in her annual reviews and client check-ins, inquiring about family-owned properties and assets, to ensure no one is missed with this new reporting guideline.

But many are still confused about what is and isn’t classified as a bare trust for tax purposes. Below is a list of bare trust exemptions that don’t require a T3 trust return.

Joint accounts and property held between spouses

These accounts will usually not be affected by the bare trust rules as both spouses in most cases have equal legal and beneficial interest because they own the assets in the account equally, says Frank DiPietro, assistant vice-president of tax and estate planning at Mackenzie Investments in Toronto.

That would not always be the case with joint accounts in which one person is a parent and the other is a child. Often, someone is added on to the title to help an aging parent with bill payments or for estate planning reasons. If a person who holds a joint account dies, the assets automatically transfer to the surviving person.

“While it may be joint in name, the parent is really still the true owner,” Mr. DiPietro explains, making it a bare trust.

Listed trusts

Listed trusts is an umbrella term for trusts that are exempt from the reporting requirements, including trusts that have less than $50,000 in market value over a given year. But Mr. DiPietro cautions advisors that certain caveats still exist. To be exempt from the new filing rules, the assets in the account must be cash, mutual funds, bonds, stocks or exchange-traded funds, Mr. DiPietro says.

“Any assets that fall outside those exceptions would require reporting,” he adds.

For example, guaranteed investment certificates (GICs) are not exempt.

“We’ve seen more interest in GICs over the past couple of years because of higher interest rates,” Mr. DiPietro says. “So, if you have a GIC that’s in [a bare trust], now it doesn’t matter that the account is less than $50,000 – it’s technically subject to these reporting requirements.”

Other examples of excluded products include shares of private corporations, private investments such as private equity and private credit funds, promissory notes, partnerships structured as flow-throughs, precious metals and cryptocurrency.

“With the more intricate assets, it’s a reportable entity,” he says. “If the investments don’t trade on a designated stock exchange, the trust is likely to be subject to the new rules.”

As for the market value of an account, if an ITF was worth $55,000 but fell to $45,000, the client would still need to file a trust return as the account was worth more than $50,000 at some point during the year, Mr. DiPietro says.

Other notable exemptions under listed trusts that do not require a T3 trust return include:

• trusts set up for registered charities (including donor-advised funds)
• a graduated rate estate
• mutual fund trusts
• segregated fund trusts
• an employee life and health trust
• qualified disability trusts
• a trust that is less than three months old

Note: This article was updated on March 28 after the Canada Revenue Agency announced it will not require Canadians with bare trusts to file a T3 for the 2023 taxation year unless the agency makes a direct request.

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