What Canadians Need to Know About Bare Trust Reporting & Its Tax Implications

Bare trusts are used in a variety of personal, family, real estate, and business arrangements across Canada. However, many Canadians may not realize that an arrangement they have entered into could be considered a bare trust for tax purposes.

This has become especially important as the Canada Revenue Agency (CRA) has introduced changes to trust reporting requirements. While bare trusts are not required to file a T3 Trust Income Tax and Information Return for the 2024 or 2025 taxation years, certain bare trusts will be required to file for taxation years ending on or after December 31, 2026.

Understanding how bare trusts work, how income from a bare trust is taxed, and when reporting may be required can help trustees and beneficiaries stay prepared for their tax obligations.

What is a Bare Trust in Canada?

A bare trust is generally an arrangement where one person holds legal title to property or an asset on behalf of another person who is considered the beneficial owner.

The person holding legal ownership is known as the trustee, while the person who is entitled to use, control, or benefit from the property is the beneficiary.

With a bare trust, the trustee generally has very little independent control over the property. Instead, they hold the asset and act according to the direction of the beneficiary. The CRA generally considers a bare trust to exist when the trustee can reasonably be viewed as acting as an agent for the beneficiaries in relation to the trust property.

This means a bare trust may exist when there is no formal trust agreement in place. The specific facts and ownership arrangement are important when determining whether a relationship is considered a bare trust.

How Bare Trusts Are Commonly Used in Canada

Bare trusts can arise in several everyday financial and ownership arrangements. Some common examples may include:

• Real estate ownership: one person may be listed on the legal title of a property while another person is the true beneficial owner
• Parents helping adult children: A parent may be added to a mortgage or property title to help an adult child qualify for financing, without actually having a beneficial interest in the property
• Business arrangements: A corporation or individual may hold an asset on behalf of another business or person
• Joint ownership arrangements: Someone may be added as a legal owner of an account or property for administrative or estate planning purposes while another person continues to receive the benefits of the asset
• Nominee arrangements: A person or corporation may hold legal title to property as a nominee for the person who actually owns and controls it

Whether any particular arrangement qualifies as a bare trust depends on the specific facts and legal relationship between the parties involved.

How Is Income Taxed on a Bare Trust?

A bare trust generally does not change who is responsible for paying tax on income earned from the property. Although the trustee holds legal title to the asset, the beneficial owner is generally responsible for reporting the income and any taxable gains associated with it.

For example, if a bare trust holds a rental property, the rental income would generally be reported by the beneficial owner rather than being taxed separately in the bare trust. Similarly, if the property is sold and results in a taxable capital gain, that gain would generally be attributed to the beneficial owner.

The tax treatment will depend on the type of asset and income involved. This may include:

• Rental income from real estate
• Interest or investment income
• Dividends
• Business income
• Capital gains when an asset is sold or transferred

It is important to separate tax liability from reporting requirements. A bare trust may be required to file a T3 Trust Income Tax and Information Return even when the income from the property is ultimately reported by the beneficial owner.

A T3 tax return is used to report certain information about a trust to the CRA. Whether a bare trust must file one depends on the applicable reporting rules and whether the arrangement qualifies for an exemption.

What Are the Reporting Requirements for a Bare Trust?

Bare trust reporting requirements have changed in recent years, which has caused some confusion for trustees and beneficial owners.

For the 2024 and 2025 taxation years, bare trusts are not required to file a T3 Trust Income Tax and Information Return or Schedule 15. However, under the updated rules, certain bare trusts will be required to file for taxation years ending on or after December 31, 2026.

When a bare trust is required to report, it may need to file a T3 return along with Schedule 15, Beneficial Ownership Information of a Trust. Schedule 15 is used to provide information about people or entities connected to the trust, such as trustees, beneficiaries, settlors, and certain other individuals who can influence the trust.

The exact filing requirement will depend on the type of bare trust, the assets it holds, their value, and whether the arrangement meets one of the available exemptions.

For most trusts with a December 31 year-end, a T3 return is generally due 90 days after the end of the tax year. This means trustees should determine their filing obligations early enough to collect the necessary ownership and trust information before the deadline.

Because the rules can vary depending on the trust arrangement, Canadians who believe they may be involved in a bare trust should review their situation carefully rather than assume that no return is required.

Exemptions to Reporting a Bare Trust

Although certain bare trusts will be required to file a T3 return for taxation years ending on or after December 31, 2026, not every bare trust will have a filing obligation.

The CRA provides several exemptions depending on the type of trust, the assets it holds, their value, and the circumstances surrounding the arrangement.

Some trusts may be exempt from the enhanced annual reporting requirements when:

• The total fair market value of the trust’s assets does not exceed $50,000 throughout the year
• The trust holds only certain permitted types of assets and their total fair market value does not exceed $250,000 throughout the year, provided the additional requirements are met
• The arrangement involves certain qualifying client trust accounts that meet the CRA’s conditions
• The trust was established to comply with certain federal or provincial laws, such as specific guardianship or bankruptcy arrangements
• The trust falls into another category specifically excluded from the enhanced trust reporting rules.

The types of assets held by the trust can also affect whether an exemption applies. For example, the $250,000 exemption only applies when the trust holds certain qualifying assets and meets the other conditions set out under the Income Tax Act.

Because these exemptions include specific requirements, simply having a trust with assets below a certain value does not automatically mean no filing is required.

The CRA recommends reviewing a trust’s filing obligations each year, as changes in its assets, value, ownership, or structure could affect whether it qualifies for an exemption.

Are There Penalties for Not Filing a Bare Trust T3 Return?

Yes, if a bare trust is required to file a T3 return and does not do so by the deadline, penalties may apply.

The penalty can depend on whether the trust has unpaid taxes and the reason the filing requirement was not met. If a trust has no unpaid tax owing, a late filing penalty may be calculated at $25 per day, with a minimum penalty of $100 and a maximum of $2,500.

More significant penalties can apply when a required return is knowingly not filed, or when a false statement or omission is made in circumstances amounting to gross negligence. In those cases, the penalty can be the greater of $2.500 or 5% of the highest fair market value of the property held by the trust at any point during the year.

Missing or incomplete beneficial ownership information can also lead to penalties. This makes it important for trustees to collect the required information and determine whether their bare trust has a filing obligation before the deadline.

Let Advanced Tax Help With Your T3 Return

Advanced Tax Services can help trustees and beneficial owners understand their filing obligations and prepare the required trust tax documents. This may include reviewing the trust arrangement, determining whether a T3 return or Schedule 15 is required, and helping ensure the necessary information is reported accurately and on time. If you need support with a bare trust or other trust tax matter, learn more about Advanced Tax Services’ Estate and Trust Tax Services.