Bare trusts to face steeper tax compliance obligations in Canada

Tax compliance burdens for bare trusts are set to increase significantly as pending legislation will change previous reporting obligations.

Bare trusts effectively bifurcate legal title and beneficial interest, while only obligating the legal title holder to transfer the property on request of the beneficial owner. They are usually treated as flow-through entities for tax purposes—with all income of the trust reported by the beneficiary—and were historically exempt from filing a separate return.

But this could all change if Bill C-15 becomes law; several types of trusts, including many commercial real estate structures, will be required to report—or face significant penalties.

The Canada Revenue Agency (CRA) faced criticism amid confusion over the waiving of the filing requirement for the 2023 to 2025 taxation years, so it’s imperative for affected taxpayers to stay apprised of their current obligations and any future requirements.

Definitions and applications

A trust is a relationship that arises where legal title in a property is held by one person—the trustee—for the benefit of one person or more, known as the beneficiary.

In a bare trust, the trustee is bound to follow all of the beneficiary’s instructions regarding the property in question. The trustee has no independent powers, responsibilities or duties to perform—other than to convey the property to the beneficiary upon demand. The beneficiary ultimately exercises the rights of ownership over the trust property.

Bare trusts are commonly used for commercial and personal reasons to facilitate transactions for several ownership structures, including real estate holdings, joint ventures, partnerships structures and investments.

In commercial real estate, these structures involve a single-purpose corporation—known as a nominee corporation—holding legal title to real property on behalf of beneficial owners. These are often a group of co-owners or joint venturers.

The nominee usually has minimal duties, except to hold title and convey it when the beneficial owners request it. Sometimes, the nominee may have other limited duties, such as executing a rental or mortgage document.

Current legislation and pending changes

In 2023, the Income Tax Act was amended to require express trusts—including bare trusts—to file a T3 return even when bare trusts continue to be considered flow-through entities. Bare trusts that are resident in Canada are required to file a T3 return unless they meet the criteria of a listed trust.

Canadian-resident and non-resident bare trusts are only required to file a T3 return if they owed tax for the year, had a taxable capital gain, if they disposed of capital property or if they met other criteria listed in the CRA’s T3 Trust Guide.

However, Bill C-15 proposed removing filing requirements for specific trusts—including bare trusts—with taxation years that end after Dec. 30, 2024 and before Dec 31, 2025. The CRA said that, based on Bill C-15, it “does not expect bare trusts to file” a T3 return nor a Schedule 15 for taxation years ending in 2025.

Bill C-15 would impose filing obligations on bare trusts that have taxation years ending on or after Dec. 31, 2026—but there are various exceptions to this new filing requirement.

Of note to the real estate sector is an exception for bare trusts where all of the property—or a substantial amount—is Canadian resource property held solely for the use or benefit of one or more public companies, or subsidiaries or partnerships of such companies.

Another relevant exception is available if:

• A corporate general partner holds title to property—such as real estate—for the benefit of the other partners, and
• Those other partners are obliged to file a T5013 partnership return.

In this situation, the bare trust will not be deemed an express trust and will not be required to file a trust return, but the partners will still have the requirement to file a T5013 partnership return.