17 June 2025 STEP Roundtable Q. 13, 2025-1067401C6 - Trust Holdbacks and Section 159 Clearance Certificate Requests

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: Reporting requirements where a trust distributes assets of the trust but holds back cash or other assets until a clearance certificate has been obtained.

Position: It is a question of fact and law whether a bare trust exists. Where a bare trust has been created, unless exempted by another provision, there would be a file obligation for a T3 return and a requirement to provide the beneficial ownership information.

2025 STEP CRA Roundtable – June 17, 2025

QUESTION 13. Trust Holdbacks and Section 159 Clearance Certificate Requests

Where trustees of a trust distribute the assets of the trust, but hold back $1,000,000 of cash or other assets representing all or a portion of the assets distributed until a clearance certificate under subsection 159(2) has been obtained by the trustees, can the CRA confirm that the property subject to the holdback is to be reported as a bare trust arrangement separate and apart from the trust? Would the response change if the amounts held back were subject to a signed holdback agreement where the beneficiaries agreed that the amount of the holdbacks would be used to pay any ongoing costs and any additional taxes identified through the clearance certificate process?

CRA Response

The question asks for clarification of the T3RET, T3 Income Tax and Information Return (T3 return) filing requirements where the trustee continues to hold property, and whether the holding of the property does or does not constitute a bare trust arrangement. (footnote 1)

Section 159 of the Act (footnote 2) outlines the need for a legal representative to obtain a clearance certificate. (footnote 3) For the purposes of subsection 159(2), a legal representative includes a trustee (other than a trustee in bankruptcy) or an executor administering, winding up, controlling or otherwise dealing in a representative or fiduciary capacity with a trust or estate’s property. Subsection 159(2) requires the legal representative of a trust to obtain a clearance certificate which certifies that all amounts for which the trust is, or can reasonably be expected to become, liable under the Act at or before the time of distribution have been paid, or that the Minister of National Revenue has accepted security for payment. The certificate applies to amounts for which you are or may become liable for payment as the legal representative. Subsection 159(3) would hold the legal representative personally liable for those unpaid amounts which are owing by the trust to the extent of the value of the property distributed before a clearance certificate has been obtained under subsection 159(2).

See Information Circular IC82-6R13, Clearance Certificate, (footnote 4) for additional guidance, including information on when a distribution is considered to have been made.

As outlined in questions 1.1 and 1.2 of the Enhanced Reporting Rules for Trusts and Bare Trusts, (footnote 5) determining whether a particular arrangement is a trust is a question of fact and law based on an analysis of the circumstances specific to each situation under the applicable private law. As such, it is the responsibility of the parties involved in an arrangement to determine the true nature of their legal relationships and whether they give rise to a trust and if so, whether it is a bare trust.

Where a bare trust, that is an express trust, is created, unless any of paragraphs 150(1.2)(a) to (p) is applicable, the bare trust would be required to file a T3 return, pursuant to section 150 and to provide the beneficial ownership information outlined on Schedule 15 when required under subsection 204.2(1) of the Regulations.

In the situation where the legal representative (trustee of a trust) has distributed all of the assets of the trust but holds back $1,000,000 of assets pending receipt of a clearance certificate under subsection 159(2), it is a question of fact and law as to whether a bare trust exists.

Further, where the taxpayer has determined that a bare trust has been created, unless exempted by another provision, there would be a filing obligation for a T3 return and a requirement to provide the beneficial ownership information. For the 2023 and 2024 taxation years, the CRA does not require bare trusts to file a T3 return, including Schedule 15, unless the CRA makes a direct request for these filings.

William King
2025-106740

Response prepared by:

Todd Lichty
Specialty Audit Program Section – Clearance Certificates
Medium Business Audit Division
Small and Medium Enterprises Directorate
Compliance Programs Branch

FOOTNOTES

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

1. As outlined in question 3.1 of the Enhanced Reporting Rules for Trusts and Bare Trusts (see footnote 8 for the URL), the term “bare trust” is not defined in the Act. However, subsection 104(1) provides that 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 to be 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.

2. The Act means the Income Tax Act R.S.C 1985 c.1 (5th Supp.) as amended from time to time and consolidated to the date of this document and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

3. Process and filing requirements while obtaining a clearance certificate:

You may request a clearance certificate using Form TX19, Asking for a Clearance Certificate after all of the necessary returns have been filed; you have received the notices of assessment for the returns; any outstanding balances owing to the CRA have been paid or secured and there are no outstanding requests for adjustments, taxpayer relief, objections or appeals.

As outlined in paragraph 11 of Information Circular IC82-R13, Clearance Certificates, the CRA will issue a clearance certificate, where you have completed all of the following:

a) you establish a scheme of distribution by a date chosen by you, which is prior to the date of your request for a clearance certificate;
b) you calculate the tax payable as if the distribution had occurred on the chosen date;
c) you file a final tax return for the tax year ending on the chosen date and pay any taxes, interest, and penalties that are chargeable against or payable out of the estate or trust property; and
d) you submit the request in writing (via Form TX19 and supporting documents) including a statement that you will complete the distribution of all the property as soon as possible after receipt of the clearance certificate.

4. https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic82-6.html

5. https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/enhanced-reporting-rules-trusts-bare-trusts-faq.html