But only for 2023 income and gross misconduct could still be costly
It was December 2022 that the Income Tax Act was amended to require bare trusts to file tax returns. But despite provisions for financial penalties, the Canada Revenue Agency wants to use education instead.
The need to file a T3 tax return is a big change from how bare trusts have previously been treated for tax purposes, as the beneficiaries receive taxable income and capital gains and are responsible for the appropriate tax filings and payments. The trusts themselves only trigger a taxable event when the beneficial ownership of the property changes.
The new rules mean that bare trusts with a year-end from December 31, 2023, are required to file a return and provide information about those who are beneficial owners of the trust.
“These changes were made as part of Canada’s continuous efforts to ensure the effectiveness and integrity of the Canadian tax system,” the CRA said in a guidance note. “The changes will help the CRA verify that trusts, their fiduciaries, beneficiaries, and related parties have met their tax and filing obligations under the Income Tax Act.”
However, there are some exemptions including those trusts that have existed for less than three months or hold assets under $50,000 in certain categories.
But outside these exemptions, the CRA has updated its guidance to say that there will not be a penalty for bare trusts that file T3 returns for 2023 late, because “some bare trusts may be uncertain about the new requirements.” The agency prefers an education-first approach but only for the 2023 tax year.
This approach means that bare trusts that file their returns late will not face a $25 a day penalty up to a maximum $2,500.
Gross negligence may not avoid a penalty though, but the CRA “will only apply this penalty in the most egregious cases where a bare trust fails to file.” This would typically follow a compliance action or CRA audit but if the relatively high threshold to trigger a penalty is met, the gross negligence penalty would be equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.
The CRA has also made clear that the relief from late filing penalties is only for bare trusts and this is because 2023 is the first tax year that the entities were required to file T3 returns.
