Show Transcript
If you share a bank account with a parent or relative, you may have to file a T3 return this tax season. That’s because a joint account may be considered a “bare trust.” According to new CRA trust reporting rules, these trusts are now required to file a return. Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to provide more clarity on this issue.
*On March 12, the Canada Revenue Agency (CRA) provided some clarity around its penalty relief for bare trusts filing a T3 Return and Schedule 15 after the April 2, 2024 deadline. The CRA will waive the late-filing penalty for the 2023 tax year, except in circumstances of “gross negligence.” However, a gross negligence penalty will only be applied in the “most egregious cases” within the context of compliance action such as an audit.
*On March 28, the Canada Revenue Agency (CRA) announced it will not require bare trusts to file a T3 return for the 2023 tax year. You can visit the CRA website for more information.
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* If you share a bank account with a parent, maybe to help them manage their financial responsibilities, or with your adult child, listen up. The CRA may require you to file a T3 return this tax season. That's because a joint account may be considered a trust, a bare trust, and under new trust reporting rules, bare trusts have to file this return. So how do you know if you'll be caught by this? Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins us now with what to know. Thank goodness you're here to tell us about all of this, Nicole. So let's start things off. What is a bare trust?
* So a bare trust is essentially a situation where you have one person whose name is on legal title and they hold that for the benefit of another person. So we've got a trustee and a beneficiary. But they have no responsibilities, duties, obligations with respect to that property, other than to transfer it at the direction of the beneficiary. So essentially, we're talking about somebody who is on legal title but has no beneficial interest in the property. And it's called a bare trust because it's bare of any responsibility.
- Now, it may be documented, so we may have a bare trust agreement-- a nominee agreement, an agency agreement, a declaration of bare trust-- or it may simply be a verbal agreement. So it's not necessarily that you have a document in place that says "bare trust" that this is going to apply to you, it's really a matter of facts and circumstances.
- And it's often these sorts of things that people don't really think about as being trusts, but they might do them, for example, as you mentioned, a joint account with a parent for ease of probate planning. Or perhaps you're on title to a property to help avoid land transfer tax, or your holding property for a minor child because they don't have legal capacity to deal with those assets. It could be for a corporate reorganization and there's going to be a whole bunch of transfers of title, so we're just going to use a bare trust to make the whole process easy. So this could be something that you have set up for reasons for convenience or for administrative purposes, but that isn't what we generally think of as a trust.
* Yeah. And I know a whole lot of people, Nicole, probably ears perking up, thinking I have a joint account with my parent to help them pay their bills. Does this qualify? Which we'll talk about in terms of whether it will or not. But just to be clear, before we get to that, a bare trust, which did exist before, did not have to file this T3 form before, but now they do.
* That's right. So prior to this new legislation that came into effect, there was no obligation for a bare trust to file. And if you think about it, it's because the individual-- we kind of think of these as a flow-through. Any income is automatically attributed to the beneficiary, but due to the legislation, they are explicitly included. Now, it doesn't use the word "bare trust." It does on the CRA website. The legislation itself does not include that language. But it describes it as arrangements where a trust can reasonably be considered to act as agent for its beneficiary, with respect to all dealings and all of the trust property. So that's why it's now caught, whereas it wasn't before. It's been explicitly included.
* Got it. Now, it's also something that has been included for the 2023 tax year. So in other words, when you're getting ready to file your taxes for the year just passed, you need to do this.
* You do need to do this. So this applies to all trusts with a tax year ending December 31 or prior, so that would apply to the 2023 tax year. That means these are due March 30. But because that occurs on a weekend, it's a due date filing of April 2 for 2024, with respect to the 2023 trusts.
* Let's get to the question then that I had at the beginning and we talk about here. So if someone has a joint account with somebody, why might that be considered a bare trust?
* Well, when we think about how joint accounts are often set up, it may be that there is somebody on that account who has legal title. Their name is on it, but they have no beneficial interest in that property. And there's a lot of nuances and questions of fact that would apply, but essentially, this is what's being thought of as a trust relationship, that they are on the account. They have a legal obligation with respect to that account, but they have no beneficial interest in that property. Very often, we see that with parents adding an adult child. Those are the sorts of circumstances that might be caught now.
* And are all joint accounts considered bare trusts? Because you said there's lots of nuance. Are there some guidelines we can think about?
* So there are, but it's really, really tricky. This is a very nuanced area of law. We have legislation, and there's a lot of case law that is difficult to blend, because we have both trusts for tax purposes and trusts for trust law purposes, which are not necessarily the same thing. But with respect to joint accounts specifically, if you have a, we'll call it a true joint account with a spouse, where you're both on title, both have beneficial interests in the property, that is generally not going to be a trust. That's not a trust relationship.
- But where you have an adult child on a trust account, the presumption for trust law purposes is that that is a trust. So some difference between a resulting trust and express trust. That gets into the weeds, and there is still a lot of, I'll say, debate on where that line is drawn. But when it comes to these, we just have no hard-and-fast rules right now.
- The CRA has said that it likely does not apply to resulting trusts, but when it comes to these joint accounts, it's really hard to know. Even amongst the tax experts and lawyers and accountants that I have been talking to daily about this for months, we are not all in agreement on this. So the individual layperson is really left in a situation where if you have a joint account with a parent, assume the presumption is going to be that is a trust relationship for the purposes of these filing rules.
* And just to be clear, just because you have to file a T3 return, does not mean you will have to incur taxes per se on that? I know there will be-- because, again, you told me before we talked-- there's penalties, though, if you don't file a T3.
* There are. And this is what's very strange about it, because you do have to file. You do not have to pay tax with respect to these accounts. You don't even really need to say what the trust is holding in these accounts. But if you don't file, you are subject to very, very big penalties.
- And this is why we're sort of defaulting to the position of filing, because the penalty is the greater of $2,500 or 5% of the highest fair market value of the assets in the trust in the year. 5% is a pretty big number when we think about what some of these trusts might be. So if you're not certain-- of course, we want to get the expert opinion on this, but the default seems to be, or the best recommendation appears to be, to err on the side of filing because those penalties are just so big.
* Yeah. That is a big, big number. Finally--
* Kim, I should-- sorry. Pardon me. I should caution, though, that the CRA, because they've recognized that this is a really confusing area and really, nobody's really sure what's going on or even that these rules exist, there is an administrative concession for the 2023 tax filing year. So they're not going to apply those penalties to the year, provided that your failure to file was not intentional, that it was not a gross negligence, that you weren't just simply not filing. But if you truly did not know that you had this obligation, then there will not be those penalties for this year. But certainly going forward, we can expect those to apply.
* And then final thing is if someone wants to understand whether they should be doing this, they really do need to speak to somebody about all of this, I'm assuming, like your entire financial picture.
* You really do. And this is where you're working with your tax advisors, together with your investment and wealth advisors, to know how your accounts are held, what sorts of documentation you have put in place, what your intent was when those things were done. If there's any sort of silver lining on this, perhaps it's that some of these more casual planning options-- that people were entering into without fully appreciating what the legal implications of doing that-- may be will have less of that going forward. But for now, we certainly do need to work with our tax experts, work with our financial experts to help advise on what our obligations are, and then to get that filing done.
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* So a bare trust is essentially a situation where you have one person whose name is on legal title and they hold that for the benefit of another person. So we've got a trustee and a beneficiary. But they have no responsibilities, duties, obligations with respect to that property, other than to transfer it at the direction of the beneficiary. So essentially, we're talking about somebody who is on legal title but has no beneficial interest in the property. And it's called a bare trust because it's bare of any responsibility.
- Now, it may be documented, so we may have a bare trust agreement-- a nominee agreement, an agency agreement, a declaration of bare trust-- or it may simply be a verbal agreement. So it's not necessarily that you have a document in place that says "bare trust" that this is going to apply to you, it's really a matter of facts and circumstances.
- And it's often these sorts of things that people don't really think about as being trusts, but they might do them, for example, as you mentioned, a joint account with a parent for ease of probate planning. Or perhaps you're on title to a property to help avoid land transfer tax, or your holding property for a minor child because they don't have legal capacity to deal with those assets. It could be for a corporate reorganization and there's going to be a whole bunch of transfers of title, so we're just going to use a bare trust to make the whole process easy. So this could be something that you have set up for reasons for convenience or for administrative purposes, but that isn't what we generally think of as a trust.
* Yeah. And I know a whole lot of people, Nicole, probably ears perking up, thinking I have a joint account with my parent to help them pay their bills. Does this qualify? Which we'll talk about in terms of whether it will or not. But just to be clear, before we get to that, a bare trust, which did exist before, did not have to file this T3 form before, but now they do.
* That's right. So prior to this new legislation that came into effect, there was no obligation for a bare trust to file. And if you think about it, it's because the individual-- we kind of think of these as a flow-through. Any income is automatically attributed to the beneficiary, but due to the legislation, they are explicitly included. Now, it doesn't use the word "bare trust." It does on the CRA website. The legislation itself does not include that language. But it describes it as arrangements where a trust can reasonably be considered to act as agent for its beneficiary, with respect to all dealings and all of the trust property. So that's why it's now caught, whereas it wasn't before. It's been explicitly included.
* Got it. Now, it's also something that has been included for the 2023 tax year. So in other words, when you're getting ready to file your taxes for the year just passed, you need to do this.
* You do need to do this. So this applies to all trusts with a tax year ending December 31 or prior, so that would apply to the 2023 tax year. That means these are due March 30. But because that occurs on a weekend, it's a due date filing of April 2 for 2024, with respect to the 2023 trusts.
* Let's get to the question then that I had at the beginning and we talk about here. So if someone has a joint account with somebody, why might that be considered a bare trust?
* Well, when we think about how joint accounts are often set up, it may be that there is somebody on that account who has legal title. Their name is on it, but they have no beneficial interest in that property. And there's a lot of nuances and questions of fact that would apply, but essentially, this is what's being thought of as a trust relationship, that they are on the account. They have a legal obligation with respect to that account, but they have no beneficial interest in that property. Very often, we see that with parents adding an adult child. Those are the sorts of circumstances that might be caught now.
* And are all joint accounts considered bare trusts? Because you said there's lots of nuance. Are there some guidelines we can think about?
* So there are, but it's really, really tricky. This is a very nuanced area of law. We have legislation, and there's a lot of case law that is difficult to blend, because we have both trusts for tax purposes and trusts for trust law purposes, which are not necessarily the same thing. But with respect to joint accounts specifically, if you have a, we'll call it a true joint account with a spouse, where you're both on title, both have beneficial interests in the property, that is generally not going to be a trust. That's not a trust relationship.
- But where you have an adult child on a trust account, the presumption for trust law purposes is that that is a trust. So some difference between a resulting trust and express trust. That gets into the weeds, and there is still a lot of, I'll say, debate on where that line is drawn. But when it comes to these, we just have no hard-and-fast rules right now.
- The CRA has said that it likely does not apply to resulting trusts, but when it comes to these joint accounts, it's really hard to know. Even amongst the tax experts and lawyers and accountants that I have been talking to daily about this for months, we are not all in agreement on this. So the individual layperson is really left in a situation where if you have a joint account with a parent, assume the presumption is going to be that is a trust relationship for the purposes of these filing rules.
* And just to be clear, just because you have to file a T3 return, does not mean you will have to incur taxes per se on that? I know there will be-- because, again, you told me before we talked-- there's penalties, though, if you don't file a T3.
* There are. And this is what's very strange about it, because you do have to file. You do not have to pay tax with respect to these accounts. You don't even really need to say what the trust is holding in these accounts. But if you don't file, you are subject to very, very big penalties.
- And this is why we're sort of defaulting to the position of filing, because the penalty is the greater of $2,500 or 5% of the highest fair market value of the assets in the trust in the year. 5% is a pretty big number when we think about what some of these trusts might be. So if you're not certain-- of course, we want to get the expert opinion on this, but the default seems to be, or the best recommendation appears to be, to err on the side of filing because those penalties are just so big.
* Yeah. That is a big, big number. Finally--
* Kim, I should-- sorry. Pardon me. I should caution, though, that the CRA, because they've recognized that this is a really confusing area and really, nobody's really sure what's going on or even that these rules exist, there is an administrative concession for the 2023 tax filing year. So they're not going to apply those penalties to the year, provided that your failure to file was not intentional, that it was not a gross negligence, that you weren't just simply not filing. But if you truly did not know that you had this obligation, then there will not be those penalties for this year. But certainly going forward, we can expect those to apply.
* And then final thing is if someone wants to understand whether they should be doing this, they really do need to speak to somebody about all of this, I'm assuming, like your entire financial picture.
* You really do. And this is where you're working with your tax advisors, together with your investment and wealth advisors, to know how your accounts are held, what sorts of documentation you have put in place, what your intent was when those things were done. If there's any sort of silver lining on this, perhaps it's that some of these more casual planning options-- that people were entering into without fully appreciating what the legal implications of doing that-- may be will have less of that going forward. But for now, we certainly do need to work with our tax experts, work with our financial experts to help advise on what our obligations are, and then to get that filing done.
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