By Terrance S. Carter, Theresa L.M. Man, and Jacqueline M. Demczur

The good news is that the Canada Revenue Agency (“CRA”) announced at 2:30 pm on Thursday, March 28, 2024, just before the long Easter weekend, that the CRA “will not require bare trusts to file a T3 Income Tax and Information Return (T3 Return), including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request for these filings.” Although the announcement of the exemption came only days before the filing deadline of April 2, 2024, it is still good news nonetheless.

The not so good news is that the exemption for T3 filing by bare trusts does not extend to express trusts. In general terms, this means that charities and not-for-profits (“NFPs”) that may be trustees under an express trust with a beneficiary or beneficiaries that are not the charities themselves (as an internal trust) or are listed trusts (for example trusts of under $50,000 in certain situations) will still need to file a T3 Return with a Schedule 15 by the filing deadline of April 2, 2024, or otherwise face serious penalties.

The difficulty in knowing what a charity or NFP should do arises from the lack of clarity about what constitutes an express trust and what constitutes a bare trust. Putting aside what the common law (case law) and legal commentators may have to say on the topic, all one has to do is to refer to what the CRA has to say on the distinction between the two to see the considerable potential for confusion.

In this regard, the following is the CRA’s definition of what an express trust means:

Generally, an express trust is a trust created with the settlor's express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provision of a statute). Many types of trusts are express trusts.

Compare that with the CRA’s definition of a bare trust:

The term "bare trust" is not defined in the Income Tax Act. However, a bare trust for income tax purposes is a trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property.

A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

A common example of a situation where a bare trust arrangement can exist is when, for privacy reasons, a property developer establishes a bare trust arrangement that will hold registered title to real property, while the developer retains beneficial ownership.

If you are confused in understanding the difference between the two, you are not alone. Even lawyers have different views on the distinction, particularly when it is possible that an express trust might also be a bare trust. Although bare trusts are exempt from filing T3 Returns for 2023, this does not mean that a bare trust that is established as an express trust will necessarily be exempt from having to file a T3 return by April 2, 2024. An example would be where a written declaration of trust was signed indicating expressly that the function of the trustee is to be that of a bare trustee only. Another example would be a religious denomination or an umbrella organization holding funds or other property in trust for a separately incorporated member of the denomination or umbrella organization pursuant to some form of express trust agreement or arrangement.

Given the nuances involved in distinguishing a bare trust from an express trust, charities and NFPs may find that they have to incur needless expense to retain legal and accounting professionals to give them advice on unnecessarily complex tax rules. It should not have to be like this for charities and NFPs that already have scarce resources to do their essential work on behalf of all of us in society.

We have been calling for the CRA to provide clarity about the impact of the trust reporting rules on charities and NFPs since June 2023, particularly since the CRA announced on November 10, 2023 that internal trusts of charities would be exempt from filing T3 Returns. Please refer to our November 2023 Charity & NFP Update and February 2024 Charity & NFP Update for reference. These calls for clarification were in addition to our original article on trust reporting rules and their impact on charities and NFPs in our Charity & NFP Law Bulletin No. 522, in which we pointed out that the new trust reporting rules were going to require internal trusts of charities (like endowments and scholarship funds) to have to file T3 Returns. Fortunately, the CRA finally took a reasonable administrative position on November 10, 2023 and announced that T3 Returns would not be required for internal trusts of charities as explained in our Charity & NFP Law Bulletin No. 523.

Given the confusion that charities and NFPs face in determining what constitutes a bare trust compared to an express trust, and the inadequate time that charities and NFPs have to determine whether they might be involved in a relationship that constitutes an express trust that requires filing a T3 Return by the looming deadline of April 2, 2024 in order to avoid significant penalties, the CRA should do the right thing and also announce an exemption for express trusts that are not listed trusts from having to file T3 Return for the 2023 year. This should be done, if not for all taxpayers, at least for charities and NFPs given the limited resources that they have to deal with the complexities of the unnecessarily confusing new trust reporting rules. Hopefully, some additional good news will soon be coming from the CRA!