HOW WELL DO YOU KNOW YOUR TRUST TAX OBLIGATIONS?
A trust is a legal relationship that is created where property is entrusted to a person to hold or manage the property for the benefit of another.
The person who creates the trust is called the Settlor, the person who holds or manages the property is called the Trustee, whereas the person who is to benefit from the holding or management of the property is called the beneficiary.
Trusts separate the legal from beneficial ownership of property. Trusts can be created expressly or by conduct.
REGULAR AND BARE TRUSTS
Parties to a trust may maintain varying levels of control over the trust, depending on the terms of the trust. This underscores the concept of bare trusts. It also results in the possible categorization of trusts into regular and bare trusts.
Whether a trust is a regular or bare trust is dependent on the facts of each case. In regular trusts, the trustee has full decision-making power and responsibility for managing the trust’s assets. Here, the trustee uses his or her judgment to act in the best interests of the trust, rather than depending on the beneficiary’s instructions.
However, a Bare Trust is the exact opposite. In bare trusts, the trustee holds the asset in name only and acts strictly or primarily on the instructions of the beneficiary. The trustee does not really have any discretion or active management responsibilities.
Our experienced Canadian tax lawyers can help you set up a regular or bare trust depending on your tax planning or strategic needs.
TAXATION AND REPORTING OBLIGATIONS FOR TRUSTS: REGULAR AND BARE TRUST IN FOCUS
With regular trusts, the trust itself pays taxes on any income or capital gains unless allocated to beneficiaries and reported on T3s; Bare Trusts, on the other hand, are ignored for tax purposes. All income or gains from a Bare Trust are reported on the beneficiary’s personal tax return, and taxes are paid by the beneficiary, not the trust.
In Canada, trusts are generally treated as taxpayers and require a trust account number with the CRA.
By virtue of the current trust reporting rules, most trusts must, each year, file:
- A T3 Trust Income Tax and Information Return, and
- Schedule 15 – Beneficial Ownership Information, which discloses the name, address, date of birth, tax residency, and tax ID number of all key stakeholders (trustees, beneficiaries, settlors, or anyone with control over trust decisions).
Trusts are required to file the T3 Return if the trust is an express trust, i.e. a trust that is, for civil law purposes, not imposed by a judgment of court or established by law. The T3 Return is also required to be filed by a trust where, in that taxation year, any of the circumstances contained in Query 2.1 of this CRA page, detailing applicable provisions of the ITA, apply to the trust. These circumstances include: The trust has taxes payable; has taxable capital gains or has disposed of capital property (certain exclusions for non-resident trusts apply); is requested to file T3 Returns, is a deemed resident trust; is a reversionary trust; makes certain kinds of distributions; and more.
However, bare trusts are exempt from filing the T3 or Schedule 15 for the 2023 and 2024 tax years, unless the CRA specifically requests it. This may also be the case for the 2025 tax year.
The trustee is responsible for ensuring that the trust meets all tax filing and disclosure obligations. Late or missed filings can result in penalties and interest. With Bare Trusts, this responsibility ultimately falls to the beneficiary. Our top Canadian tax lawyers can help you determine the category of your trust, and whether you should file tax reports for the tax year.
REVERSIONARY TRUSTS AND THEIR TAXATION.
A discussion on the categorization of trusts based on control will not be complete without some insights on Reversionary trusts.
These trusts are sometimes categorized as Bare Trusts, since they still harp on the control that the Settlor wishes to exert over the trust assets, usually as a beneficiary. A reversionary trust is deemed where trust property is structured to revert (return), directly or indirectly, to the settlor; or if the settlor can determine who receives the property in the future; or where, during the lifetime of the settlor, the property will not be disposed of without his consent or direction.
In such cases, any income or gains generated may be taxed in the hands of the settlor, provided the settlor continues to be resident in Canada for tax purposes. This will also be the case where the trust property is disposed of and replaced with another property.
There are exceptions to this rule—for example, if the settlor is only entitled to receive income (not the capital or the underlying property) and is not able to influence distributions, i.e., if the settlor is a trustee, there must be at least two other trustees, and trust decisions must be made by majority vote.
It’s important to note that the CRA took the position in an archived CRA interpretation that this exception generally applies only to business income earned by the trust— not to investment income. However, if the investment income is reinvested to generate additional income, the exception may then apply.
Other exceptions include: where the settlor lends money or property to the trust at the prevailing market rate; or in most cases, where the trust is a registered deferred income plan, i.e. registered retirement savings plans, tax-free savings accounts, registered education savings plans, employee benefits plans, and more. Our top Canadian tax lawyers can guide you to determine if you fall within any of the above exceptions.
ALTER-EGO TRUSTS AND JOINT-PARTNER TRUSTS
These rules that apply to trusts and trust reporting may not also apply to you, if you are 65 years or older and a Canadian resident. This underscores the concept of alter-ego trusts. To enjoy the privileges of this trust, you have to be the sole beneficiary of the trust in your lifetime. In an alter-ego trust, you can act as the settlor, the trustee and the beneficiary, without the tax consequences that follow a bare trust.
Alter-ego trusts are taxed separately from the settlor/beneficiary, even though they are essentially bare trusts. Alter-ego trusts also allow the settlor to name beneficiaries in the trust deed, who will receive the trust property after the settlor’s death. This helps the trust avoid probate fees and many other applicable fees in a very private fashion. Alter-ego trusts are essentially a discrete substitute for a Will.
Alter-ego trusts are also exempted from the 21-year deemed disposition rule for trusts in your lifetime; they also allow you to transfer properties to the trust at cost (without triggering immediate tax obligations). As a result, most capital properties can be seamlessly transferred in this fashion, on a tax-deferred basis. However, non-capital properties like inventory may not enjoy such tax deferral.
The privileges accorded to alter-ego trusts may be extended to your spouse, even if they may be younger than you are. This could be done through another type of trust called “joint-partner trusts.” While reporting to the CRA, you can make an election for your trust not to be treated as an alter-ego or joint-partner trust.
Our experienced Canadian tax lawyers can help you set up your alter-ego, joint-partner trusts, or give you the needed legal advice.
PRO TAX TIPS: Whenever you have significant control over any trusts, make sure you keep meticulous records.
If you have a belief that a trust in which you are a beneficiary may be considered a bare trust, it is important that you keep meticulous records of all income and distributions from the trust. This is because the reporting obligations may eventually fall on you. It is not a good idea to be caught up with the CRA when you are unprepared or do not have proper records. This tip is even more important for the 2025 tax year, since there is a possibility that bare trusts may be required to make annual reports like regular trusts.
In fact, it is most advisable that you keep meticulous records in all situations where you have significant control over any trusts or trust property, irrespective of your relationship to the trust.
For advice on the kind of records and filing requirements that apply to your specific situation, speak to our top Canadian tax lawyers today.
Frequently Asked Questions (FAQs):
What are the advantages of bare trusts?
Bare trusts have several benefits depending on a person’s planning objectives. The benefits could be from both a tax planning and a business perspective. Bare trusts can be used to conveniently hold several investments; manage joint business ventures through a trustee; reduce repeated property transfers in corporate reorganizations; immediately transfer beneficial ownership in situations where legal title transfer may be delayed; minimize probate costs and delays in estate planning; and more. Feel free to reach out to our top Canadian tax lawyers to determine if a bare trust suits your planning needs.
Are some trusts exempted from filing the Schedule 15 – Beneficial Ownership Information?
Yes. Listed trusts are not required to include the Schedule 15 – Beneficial Ownership Information when filing a T3 Return. The list is very detailed in Query 2.3 of this CRA page, containing the applicable provisions of the Income Tax Act.
The listed trusts include: trusts that have been in existence for less than 3 months; registered charities; lawyers’ general trust accounts; trusts with assets of less than $50,000, provided their holdings are money, government debts and listed securities; mutual fund trusts; Graduated Rate Estates; Qualified Disability Trusts; related Segregated Fund Trusts; Master Trusts; trusts that are under or governed by a Registered Plan; Cemetery Care Trust or trust governed by an eligible funeral arrangement. Speak to our top Canadian tax lawyers to determine if you are exempt from a Schedule 15 filing.
Why are trusts usually set up by means of a Trust Deed?
Trusts do not need to be created in writing; they can be set up orally or by conduct. However, it is preferred to set up trusts in writing for purposes of clarity and ease of enforceability. In fact, a document setting up a trust may not even be called a trust deed. The title of the document may bear no relationship to trusts, but nevertheless, the relationship created by the agreement will be deemed a trust by the CRA, other authorities or applicable laws.
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.