4 June 2024 STEP Roundtable Q. 8, 2024-1007841C6 - Disposition of Property Held in 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: In a situation where a Bare Trust is a trust described in paragraph 150(1.2)(b), would subparagraph 150(1.1)(b)(ii), in itself, require that the Bare Trust file a T3 return for a year in which property held by the Bare Trust is disposed of?

Position: No.

Reasons: See below.

2024 STEP CRA Roundtable – June 4, 2024

QUESTION 8. Disposition of Property Held in a Bare Trust

An express trust arrangement has been established under which the trust can reasonably be considered to act as agent for the sole beneficiary with respect to all dealings with all of the trust’s property. This trust is referred to as the “Bare Trust”. The Bare Trust is not a trust described in any of paragraphs (a) to (e.1) of the definition “trust” in subsection 108(1) of the Income Tax Act (the “Act”). (footnote 1) The sole beneficiary of the Bare Trust is either a natural person or a corporation. Throughout the year, the Bare Trust is resident in Canada and holds only a CDN$10,000 Government of Canada Bond (the “Bond”), which is a debt obligation described in paragraph (a) of the definition “fully exempt interest” in subsection 212(3), and money. The Bond is held by the Bare Trust as capital property.

The Bond matures in the current taxation year and is paid out in cash denominated in Canadian dollars. Thereafter the Bare Trust holds only this cash in Canadian dollars. Thus, throughout the current taxation year the Bare Trust has held no property other than the Bond and money, the fair market value of which did not exceed CDN$50,000, and therefore meets the conditions set out in paragraph 150(1.2)(b). Also, there is no tax payable by the Bare Trust for the current taxation year, as all income and capital gains in respect of the trust property are reported by the sole beneficiary of the Bare Trust, who is the beneficial owner of the trust property.

(a) Does the CRA agree that subparagraph 150(1.1)(b)(ii), in itself, would not require the Bare Trust to file a T3 Trust Income Tax and Information Return (“T3 return”) for the current year because the Bare Trust has not disposed of the Bond within the meaning of "disposition" as that term is defined in subsection 248(1)?

(b) If, following the maturity of the Bond, the Bare Trust is terminated during the current year and all of the money held by the Bare Trust is thereupon transferred to the beneficiary, would subparagraph (b)(v) of the definition of “disposition” in subsection 248(1) deem the Bare Trust to have had a “disposition” in the year, and if so, would the Bare Trust be required to file a T3 return for the year?

CRA Response

Part (a) of the question describes a situation in which the Bare Trust continues to hold the proceeds received on the maturity of the Bond throughout the remainder of the taxation year. The question asked is whether subparagraph 150(1.1)(b)(ii) would, in itself, require the Bare Trust to file a T3 return for the current year. The answer to this depends on whether the Bare Trust is considered to dispose of the Bond when the Bond matures and the proceeds are paid to the Bare Trust.

Paragraph 150(1)(c) requires a trust (which for this purpose would include the Bare Trust (footnote 2) ) to file a T3 return for a taxation year. This requirement is subject to an exception in paragraph 150(1.1)(b) that applies to a taxpayer that is an individual, unless (i) there is Part I tax payable for the year by that individual, (ii) where the individual is resident in Canada, the individual has a taxable capital gain or disposes of capital property in the year, or (iii) certain other circumstances that are not relevant to the Bare Trust are applicable. We understand that the Bare Trust considered herein is resident in Canada, has no Part I tax payable for the year, and has not realized a capital gain in the year.

However, even if an individual meets the foregoing criteria so as to qualify for the filing exception in paragraph 150(1.1)(b), where the taxpayer is a trust, it may be required to meet further criteria in order to so qualify. Subsection 150(1.2) provides that the filing exception in subsection 150(1.1) does not apply to a taxation year of a trust if the trust is resident in Canada and an express trust (which for this purpose would include the Bare Trust), or for civil law purposes a trust other than a trust that is established by law or by judgement, unless the trust is a trust described in any of paragraphs 150(1.2)(a) to (o). (footnote 3) We understand that the Bare Trust in this situation would be a trust described in paragraph 150(1.2)(b).

Therefore, provided that the Bare Trust has not disposed of capital property during the year, it would be concluded that the Bare Trust would qualify for the exception in subsection 150(1.1) and would therefore not be required to file a T3 return for the year in question. (footnote 4)

Subsection 104(1), in effect, provides that the Bare Trust would be considered to be a trust for the purposes of certain provisions in the Act including section 150, and including for purposes of subparagraph (b)(v) of the definition of “disposition” in subsection 248(1). Subparagraph (b)(v) of the definition of “disposition” would be applicable if the Bare Trust ceased to act as agent for a beneficiary under the trust with respect to any dealing with any of the trust’s property. Subparagraph (b)(v) is therefore not relevant to the situation in part (a) of the question. Subsection 104(1), in effect, provides that the Bare Trust would also be regarded as a trust for purposes of paragraph (k) of the definition of “disposition” (which applies in circumstances that are not relevant to the situation at hand), but does not result in the Bare Trust being regarded as a trust for other purposes of the definition of “disposition”. Accordingly, the Bare Trust would be deemed to not exist as a trust for purposes of the remaining parts of the definition of “disposition”. Therefore, although a disposition of the Bond may well be considered to have occurred on maturity of the Bond, this is not regarded as a disposition by the Bare Trust.

Accordingly, we conclude that subparagraph 150(1.1)(b)(ii), in itself, would not require the Bare Trust to file a T3 return for the current year.

Part (b) of the question describes a situation in which, following the maturity of the Bond, the Bare Trust is wound up and the cash proceeds from the Bond are transferred to the beneficiary. The question that has been asked is whether this would amount to a disposition by the Bare Trust because of the application of subparagraph (b)(v) of the definition of “disposition” in subsection 248(1), and if so, whether the Bare Trust would be required to file a T3 return for the taxation year. As noted above, subsection 104(1) provides that the Bare Trust will be treated as a trust for purposes of subparagraph (b)(v) of the definition of “disposition”.

However, we conclude that, provided that there is no change in the beneficial ownership of the property held by the Bare Trust when such property is transferred to the sole beneficiary, then notwithstanding the wording of subparagraph (b)(v), paragraph (e) in the definition of “disposition” would be applicable. This is because paragraph (e) excludes from the meaning of “disposition” of a property, any transfer of the property as a consequence of which there is no change in the beneficial ownership of the property. We note that the exclusion in paragraph (e) is subject to certain exceptions set out in subparagraphs (e)(i), (ii) and (iii). Subparagraphs (e)(i) and (iii) refer to transfers to a trust and so are not relevant in this situation. Subparagraph (e)(ii) refers to a transfer from a trust to a beneficiary under the trust and could therefore be relevant. However, since there is nothing in subsection 104(1) that would deem the Bare Trust to be a trust for purpose of subparagraph (e)(ii) in the definition of “disposition”, this exception also would not be applicable. The result is that the termination of the Bare Trust would not be considered to result in a disposition of the property held by the Bare Trust.

Judith Harris
2024-100784

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

2 Note that effective for taxation years ending on or after December 31, 2023, subsection 104(1) provides that the Bare Trust will be considered to be a trust for the purposes of section 150. However, pursuant to the announcement on March 28, 2024, the CRA will not require bare trusts to file a T3 Return, including Schedule 15, for the 2023 tax year, unless the CRA makes a direct request for these filings.

3 Bill C-69, An Act to implement certain provisions of the budget tabled in Parliament on April 16, 2024, includes the addition of proposed paragraph 150(1.2)(p), applicable to taxation years that end after December 30, 2023.

4 Note that a T3 return may be required to be filed for a taxation year as a result of the reporting requirements in section 204 of the Income Tax Regulations in certain circumstances. However, such circumstances would not be applicable to the Bare Trust. See the section titled, “Who should file” in the T4013 T3 Trust Guide for more information.