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Bare trusts: Many Ontario farmers expected to have new tax filing requirements

Bare trusts: Many Ontario farmers expected to have new tax filing requirements

Synopsis
3 Minute Read

New tax filing requirements will have a significant impact on farmers, particularly in Ontario. Many farmers will now find themselves with a new filing requirement based on the common use of bare trust agreements in their operation.

Partner, Assurance & Accounting

Why do you need to know about bare trusts? Significant changes to the trust filing requirements mean every farmer must now be able to identify their bare trust agreements and meet new T3 filing obligations.

Have you added someone or been added by someone to a property such as land, a residence, bank account, or investment account?

Many farmers use this type of planning to facilitate farm operations, but they didn’t need to be too familiar with any bare trust agreements created, until now.

New federal trust reporting rules will come into effect for taxation years ending after December 30, 2023, and knowing how to meet the filing requirements can have lasting impacts on your operations.

The new trust filing and disclosure rules include bare trust agreements which were previously exempt from filing. A bare trust arrangement is a legal relationship where one person (individual/ corporation/ trust) legally owns a property or part of a property but does not have any rights or obligations with respect to the property; the rights and obligations of the property are held in trust for another person.

Impact when new legislation takes effect

The end of 2023 signals a change to existing reporting requirements for agriculture trusts. Here are a few key things to know for tax years ending December 31, 2023 and later:

  • Bare trusts generally exist where the legal ownership (i.e. who is on the title for the asset, but has no rights or obligations) and the beneficial ownership (i.e. who has all the rights and obligations with respect to the asset) are separate. It is important to remember that whether a bare trust exists is a legal determination.
  • A trust return must be filed 90 days after year end – usually March 31.
  • Penalties for not filing the trust return are $25 per day for each day it’s late to a minimum of $100 and a maximum of $2,500.

Examples of common bare trusts for farmers that will now result in a tax filing requirement

Based on experience with our clients, below are common planning arrangements that can result in bare trust arrangements, which would now be subject to a T3 tax filing requirement:

Managing land title mergers

When two contiguous properties are owned by the same person, municipalities in Ontario will often merge the land titles. It is often inconvenient for estate, succession, and future sale planning when multiple land titles are merged into one. Therefore, a common solution is to ensure the legal ownership is not identical: Property 1 is owned by Farmco, and Property 2 is owned by Farmco (99 percent) and Mr. X (one percent). As the legal ownership is not identical, the two properties will not be merged by the municipality.

In this scenario, it is still Farmco, the beneficial owner, who holds 100 percent of the rights and obligations with respect to both Property 1 and Property 2: Farmco paid the purchase price, Farmco is responsible for the upkeep, and Farmco is entitled to all proceeds in the event of a sale. Mr. X, the legal owner of a one percent interest in Property 2, can be viewed as a bare trustee with no rights and responsibilities to Property 2. In this case, Mr. X is now required to file a T3 trust return to disclose the bare trust arrangement.

Deferral and cancellation of land transfer taxes

When a farm property is transferred from Corp A to Corp B, both of which are controlled by the same person, it may be possible to apply for a deferral and cancellation of land transfer taxes. If this planning is implemented, a bare trust arrangement can arise, as a bare trust company Corp C (the legal owner) holds title to a farm property for a period of at least three years, in trust for Corp B (the beneficial owner) which received the rights and obligations with respect to the farm property from Corp A. If this is the case, Corp C is now required to file a T3 trust return to disclose this bare trust arrangement.

Estate planning

A common estate planning strategy is to add another person to the title of an asset, whether it is land, a house, or a bank account. There is no desire to transfer the beneficial ownership of the asset to this person at this time, as the intention is to simply allow a smooth administration of an estate. As the additional person added to the title is not a beneficial owner, he or she can be viewed to act in the capacity of a bare trustee in a bare trustee arrangement and is subject to these new filing and disclosure rules.

It's important to note that whether a bare trust exists is a legal determination. Most bare trust arrangements cannot be easily identified from financial statements or prior years’ income tax returns. It is best to discuss your situation with your MNP advisor so that any identified bare trust arrangements and filing requirements can be addressed.

Contact us

To learn more about how your operation may be impacted by the upcoming changes to filing requirements and the exemptions available, contact Joel Aalbers, Partner, CPA, CGA.

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