Navigating trusts and taxes in Canada: A beginner’s guide, including new guidelines on bare trust reporting requirements.

January 30, 2024

When it comes to inheriting high value things from family, like a home, there are a lot of considerations on how best to do so. Some of these come with massive tax burdens, while others work differently. This blog will help you navigate the complicated world of trusts, and how to get the most out of them with the lowest administrative and tax burdens.

What is a trust?

A trust operates as a specialized vessel, safeguarding assets or wealth for the benefit of others. A trust involves 3 key players:

  • The Settlor: This is the person who initiates the trust. They are the owner of the wealth or property and are giving it to the beneficiary.
  • The Trustee: This person oversees and manages the trust’s assets, ensuring they align with the intended purpose for the designated beneficiary.
  • The Beneficiary: This is the recipient of the trust.

Benefits of using a trust.

Asset protection: Trusts act as shields that can protect assets from unforeseen events or potential debts. By placing assets in a trust, people can create a protective barrier that ensures the intended beneficiary receives their share without the interference of external factors that could take away from what they would receive. This could be legal liabilities or creditors who want to collect on debts.

They wouldn’t be able to access the assets within the trust to pay these debts. In some situations, trusts can offer a layer of protection against creditors. Assets held within an irrevocable trust may be shielded from potential claims by creditors because they’re no longer considered the property of the individual who established the trust.

Tax efficiency: If, for example, a family member wishes to pass down an estate to the next generation, a trust can potentially mitigate estate taxes the beneficiary might otherwise need to pay. This all depends on how the trust is structured, and something that should be discussed with a lawyer specialized in the field.

Probate avoidance: Probate is the legal process that validates a will and allows the executor to distribute assets after a person’s death. If assets are held in a trust, probate wouldn’t be necessary, which is helpful to beneficiaries as it avoids probate fees and delays in accessing the asset.

Disadvantages of using a trust.

Trusts are not all fun and games, and in the world of complex financial planning, trusts do have some drawbacks.

They are complex: There’s no getting around it. Trusts are complex and take lawyers, planning, and good administration to be able to manage. Some people are deterred by financial complexities and choose to go with more straightforward financial arrangements.

Financial costs: We’re sure you guessed it when we said lawyers and financial planners would be involved. The creation and administration of a trust comes with expenses for the settlor, the trustee, and the beneficiary, and this might make a trust less suitable for the situation.

Creating a trust.

For anyone considering creating a trust, here are the main components and considerations.

  1. Define the purpose: Clearly articulate the objectives of the trust. What’s it for and what’s it supposed to accomplish?
  2. Select the key players: Who is the best trustee who can be responsible for the trust once the settlor sets it up? Who is/are the beneficiar(ies)? If the key players can’t work in harmony, this might cause more trouble down the road.
  3. Draft the trust deed: The trust deed is the document that outlines the rules of the trust, the responsibilities of each person involved, and how the assets will be distributed when the time comes.
  4. Fund the trust: It all becomes real when the financial asset is transferred into the trust.

What is a bare trust?

A bare trust is an arrangement where the trustee acts as the agent for the beneficiary under the trust, where the trustee has no significant powers or responsibilities, can’t take action without the beneficiary’s instructions, and basically just holds the legal title to the asset – in most cases property. You might see this most where an adult child is added to the legal title of their parent’s home for estate planning purposes.

Your trust might not be called a bare trust on its deed or documents. It might be called a “nominee agreement” or an “agency agreement,” or might not even have a legal document but still meets the requirements.

This year and moving forward, the Canadian government have established new reporting guidelines for bare trusts.

The new guidelines on bare trust reporting requirements.

Any trusts with a year-end after December 30, 2023 will now be required to file a T3 return in order to comply with the new guidelines. To do so, they’ll need a trust account number, and the names, addresses, dates of birth and social insurance number of each trustee, settlor, beneficiary, and controlling person. A T3 also needs to be filed by the last day of March, instead of the last day of April which is Canada’s usual tax filing day. In 2024 the T3 deadline is extended to April 2 to account for the Easter long weekend.

For anyone who doesn’t file a T3 return for their bare trust, there will be a $25 per day penalty for up to 100 days. Since this filing requirement is new this year and many trustees are unaware of their responsibilities, the CRA isn’t going to charge the penalty this year. This only applies to bare trusts, not to any other types of trusts that are subject to the reporting requirements.

Don’t be intimidated by the new filing requirements. Though it may sound overwhelming and complicated, an H&R Block T3 Tax Expert can help! Let us answer any questions you might have and help you navigate the new tax requirements. Find an office near you to book an appointment today.

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