21 July 2008 External T.I. 2007-0234381E5 - filing requirements for a bare trust

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: When the income of the trust is attributed to the settlor under subsection 75(2), is a T3 return still required to be filed.

Position: Yes.

Reasons: A trust is required to file a T3 return unless it is a trust that is ignored for the purposes of the Act (e.g., a bare trust) or it meets the administrative exceptions set out in the T3 Guide. A trust under which the income is attributed to the settlor under 75(2) is not eligible for the administrative exception.

XXXXXXXXXX 	2007-023438
		Annemarie Humenuk

Attention: XXXXXXXXXX

July 21, 2008

Dear XXXXXXXXXX :

Re: Filing Requirements for a Trust

This is in reply to your letter of April 20, 2007, in which you ask whether we agree that a T3 Trust Income Tax and Information Return is not required to be filed in a situation you are considering.

As explained in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. However, we are prepared to provide you with the following general comments.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Subject to the exception described in subsection 104(1), every trust resident in Canada is required to file a return of income in prescribed form for each taxation year it is in existence under paragraph 150(1)(c). A trust must file its tax return no later than 90 days after the end of its taxation year, noting that the taxation year end for an inter vivos trust is December 31. The T3 Trust Guide, T4013, contains information concerning as to who should file a T3 Income Tax and Information Return. Pursuant to the T3 guide, a trust has to file a return if income from the trust property is subject to tax, and the trust either:

• has tax payable;
• has a taxable capital gain or has disposed of, or is deemed to have disposed of, a capital property;
• is deemed to be resident in Canada under either paragraph 94(1)(c) or proposed subsection 94(3);
• holds property which is subject to subsection 75(2);
• has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary's use; or
• receives from the trust property, any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has total income from all sources of more than $500, income of more than $100 allocated to any single beneficiary or allocated any portion of the income to a non-resident beneficiary.

In a situation such as you describe where the property was bequeathed to the beneficiaries and they subsequently transferred the property to a trust to be held on their behalf, subsection 75(2) would apply and a T3 Income Tax and Information Return would be required for each year in which the trust was in existence.

The exception described in subsection 104(1) applies when the trustees 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.

In a situation such as you describe, where the trustees are given wide latitude as to whether to retain or to distribute all or any part of the income of the trust and are entitled to make decisions with respect to the trust property, it is our view that the trustees would not be considered to act as agent for the beneficiaries.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch