Editor’s Note: On March 28, the CRA said bare trusts would be exempt from reporting requirements for the 2023 tax year unless the agency makes a direct request for these filings.

If you have a joint bank account or you co-signed a mortgage, you might be part of something called a “bare trust” agreement that many Canadians will have to file a tax return for in the coming weeks.

Bare trusts aren’t new, but this year is the first time the arrangements must be filed and reported to the Canada Revenue Agency (CRA) for the 2023 tax year. If the April 2 deadline isn’t met, some hefty penalties could apply.

“It’s very important that all Canadians really take a good stock of whatever bare trust they may have in their world and get compliant as soon as possible,” says Ameer Abdulla, a tax expert at Ernst & Young (EY).

Since the rule is new this year, many Canadians may be unaware that they have to file a bare trust return within the next few weeks.

Here’s everything you need to know:

Trust funds are commonly used by anyone looking to safeguard their assets upon their death or to provide protections for young or vulnerable individuals who receive the funds, called beneficiaries.

Bare trusts happen when someone legally owns an asset, but it technically belongs to someone else. The arrangement is essentially a separation of legal and beneficial ownership of a property.

Abdulla describes bare trusts as “when the legal ownership of a thing or a piece of property or an account does not match who is entitled to that property, that income or the gain on that property.”

The difference between a bare trust and other trust accounts is that the trustee in the former has no decision making power over the beneficiaries assets. The trustee only acts on the beneficiary’s instructions.

“For bare trust, I think a lot of them are typically innocent, like having an account for your minor child to hold birthday money, or partnering with your elderly parent who may or not be losing some of their memory. It’s a very practical way to deal with those sorts of things,” Abdulla says.

Video: Navigating tax season: Ombudsperson offers insight into CRA service

The CRA defines bare trusts as “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.”

Examples of a bare trust arrangement, according to the CRA, would be:

Trusts that hold less than $50,000 in assets may be exempt from the reporting requirements. Out of the examples above, this is likely the scenario for most joint accounts between family members.

In order for a co-signed mortgage to count as a bare trust agreement, Abdulla says financial institutions require the parent to also be included on the title.

“It’s the being on title that could create the bare trust arrangement because then you have a number of people on the legal title for a home or a condo, and the beneficial ownership might not be all the people listed,” he explains.

A growing portion of Canadians likely fall into this category of mortgage co-signers for their child or grandchild, as young people’s wages continuously struggle to keep up with the rising cost of living and homeownership. Especially after the COVID-19 pandemic, aspiring homeowners without family financing are running out of options.

Royal LePage says an online survey by Leger of more than 500 respondents in August 2023 showed six per cent of homeowners currently co-own their property with someone other than their spouse or significant other. Only 44 per cent of respondents from this group said they live with all other co-owners named in the deed.

If you are unsure about whether you’re part of a trust agreement that now requires a T3 return, a press release by EY advises Canadians to seek legal counsel.

For the first time, bare trusts are required to file T3 Trust Income Tax and Information Returns for the 2023 year.

The CRA’s deadline for trustees to file is April 2 — which notably comes before the general April 30 tax deadline for individuals.

If Canadians don’t file their bare trust returns by the deadline, they could face multiple fees or penalties. Typically, the fee is $25 per day for late filing, with a minimum penalty of $100 and maximum of $2,500.

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Abdulla notes that in some cases, a gross negligence penalty with no maximum may apply.

“Those can be assessed as the greater of $2,500 or five per cent of the trust’s property. But it’s that second penalty, that second threshold that has no limit and it’s quite significant,” he says.

However, if you miss the deadline this year, you might be in the clear. The CRA announced this week that because the new bare trust rules may be unfamiliar to Canadians, the agency will be offering relief from the penalty and will only pursue blatant cases of gross negligence.

“As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing relief to bare trusts by waiving the penalty payable under subsection 162(7) of the Income Tax Act for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline for reasons other than gross negligence,” the CRA explains.

Abdulla says that if you have a bare trust arrangement, your first step is to obtain a trust identification number. There is a process to apply for one on the CRA’s website, but then you will be able to file electronically.

“Alternatively, you do have to file an actual T3 trust income tax return which is a bit more difficult than a typical, personal tax return. And so we find it’s very important for Canadians to… identify the best way to file that trust tax return as soon as possible,” Abdulla says.

Video: New T3 reporting requirement for Canadians

Once bare trusts have filed their T3, they aren’t completely out of the woods. Abdulla says there’s one more requirement to be aware of, called Schedule 15, also known as a Beneficial Ownership Information of a Trust.

Essentially, a schedule is attached to the trust’s tax return to keep track of beneficial owner information. There, you have to list all the beneficial owners and trustees of the trust.

Even if the trust has no income to report, the new Schedule 15 forms are part of the T3 Return and therefore can’t be filed on their own.

“That’s certainly very different from 2023. Even if you had filed the bare trust return in 2022 or 2021, you may not have or you absolutely did not have to file that Schedule 15,” Abdulla says.

“It’s sort of a double whammy.”

Abdulla says if you’re worried about the new filing rules, take comfort in knowing that reporting becomes “relatively straightforward and much easier” each year.

He says the CRA’s website can offer guidance to Canadians uncertain about the process. For example, the CRA has a step-by-step guide on filing T3 trust returns.

“Certainly, the change for 2023 of, you must file (T3) and you must file Schedule 15, would appear to be very daunting for many Canadians. But certainly I can offer encouragement that the first one is the hardest,” Abdulla says.

Not long ago, the standard issue five-year fixed was Canada’s mortgage term of choice. It sold more than any other term by a long-shot.

Then came COVID-19. Suddenly, floating rates were diving below fixed rates, and borrowers were boarding the variable train.

That train got derailed as prime rates spiked 475 basis points in 17 months, but five-year fixed adoption has yet to return to the glory days of 2020-2021 — back when mortgage rates started with a “1.”

Times have turned. Nowadays, fewer than one in seven mortgagors opts for a five-year fixed, according to the latest numbers from Statistics Canada . And there’s a quintet of reasons for that:

1. For most, even the lowest nationally advertised five-year fixed rates — 4.64 per cent (insured) and 4.99 per cent (uninsured) — “feel” too high to lock into long-term.

2. Economists’ forecasts and Bank of Canada guidance have borrowers concluding that rates have peaked, so folks want to ride rates down with a variable or shorter term.

3. Three-year fixed rates have become the Goldilocks of mortgages, offering protection if inflation flares back up and a shorter term for borrowers who want to reset their rate when the prime rate drops — all for not much more than a five-year term.

4. History shows that roughly four out of five times five-year fixed rates underperform variables and short-term fixed rates — depending on what backtesting assumptions are used.

5. Prepayment penalties on five-year terms are painful, and due to how penalties are calculated, they’ll increase as short-term fixed rates drop.

Consequently, five-year fixed rates will remain unpopular for many moons.

But fivers haven’t lost all their fans. Mortgage hunters are still signing up for mortgages that mature in 2029, for three main reasons.

One is certainty. There’s no guarantee that inflation and rates will drop — and stay down — through 2029. When you’re ultraconservative, or the family budget’s tighter than a new pair of shoes, five-year fixeds provide the snug predictability many crave. And they come with Canada’s lowest rates at the moment.

The holding time frame is another factor. Most borrowers live in their homes for more than half a decade. A set-and-forget five-year mortgage therefore has appeal. As a side note, any term beyond five years entails potentially hefty prepayment penalties if you break it before the 60-month mark. By law, residential lenders cannot charge more than a three-month interest penalty after five years.

Easier approval is the third reason. Thanks to the government’s “stress test,” most borrowers must prove they can afford payments at a higher rate than their actual rate. Qualifying for a lower five-year fixed mortgage is therefore easier because the “qualifying rate” is also lower.

So, when will five-year fixed be popular again?

Lenders would love five-year mortgages to make their grand comeback. For one thing, they’re usually more profitable. Borrowers are committed to the lender longer, the lender has more low-cost sources of five-year funding (like securitization), and prepayment penalties tend to be higher when the mortgage is broken before the contract is up.

The Bank of Canada is expected to preach patience at its interest rate announcement this week as economists say weakening economic conditions are setting the stage for rate cuts in the coming months.

The central bank is widely expected to continue holding its key interest rate at five per cent on Wednesday, as many forecasters anticipate the first rate cut to come in around June.

But the Bank of Canada will have the opportunity to weigh in on the latest gross domestic product figures and how those affect the path for interest rates.

Economists say the slowdown in the Canadian economy is broadly in line with what the central bank was expecting — and hoping for.

“At the margin, things are looking a little bit weaker than what the Bank of Canada might have envisaged,” said Royce Mendes, managing director and head of macro strategy at Desjardins.

“Domestic spending was lower in the fourth quarter than it was in the third quarter. And that’s particularly concerning, given the fact that the population grew so dramatically during that period.”

The Canadian economy grew at an annualized rate of one per cent in the fourth quarter, which exceeded economists’ expectations and the Bank of Canada’s most recent forecast.

But the headline figure appears to be masking how weak the Canadian economy actually is.

Economic growth during the last three months of the year was driven by global factors, including strong U.S. spending trends which boosted Canadian exports.

Meanwhile, on a per-capita basis, real GDP continued to fall in the fourth quarter.

“This is probably the weakest one-per-cent growth I think any of us have lived through,” said Douglas Porter, BMO’s chief economist.

The Bank of Canada’s aggressive rate hikes are largely responsible for the economic slowdown. Consumers have reeled back spending as many of them face higher borrowing costs on their mortgages and other debt.

Companies are also feeling the pinch, as evidenced by falling business investment.

Perhaps the one outlier in the economic data has been the labour market. According Statistics Canada’s labour force survey, the unemployment rate ticked down to 5.7 per cent in January, hovering around pre-pandemic levels, while annual wage growth remained above five per cent.

However, Mendes says he’s grown skeptical of the labour force survey. He points out that payroll data from Statistics Canada suggests labour market conditions are weakening more meaningfully.

“I think the Bank of Canada is looking at all of these data in totality, and will come to the conclusion that if anything, the labour market has weakened since the time of the January monetary policy report,” he said.

The softening of the Canadian economy, along with improving supply chains, has paved the way to slower price growth.

Canada’s annual inflation rate tumbled to 2.9 per cent in January, back down in the Bank of Canada’s one to three per cent target range.

But the central bank has been clear that it won’t wave the victory flag until inflation is on a sustainable path back to two per cent.

That means inflation would have to continue steadily declining and core measures of inflation — which strip out volatile price movements — would need to follow suit.

Mendes says he’ll be watching closely to see what the central bank says about core measures of inflation, looking for a signal on where it will take its key interest rate.

The Bank of Canada has often pointed out that its two core measures of inflation are well above its target, suggesting price growth is still stubbornly high.

But Mendes’ research suggests those measures are flawed because they strip out too many components, making it harder to gauge where inflation is headed.

“At the least I expect the Bank of Canada to take a more holistic view of the inflation indicators and to acknowledge the progress that we are seeing in taming underlying inflationary pressures. If they don’t, I would take that as a very, very hawkish signal,” he said.

By Nojoud Al Mallees  The Canadian Press

FULL ARTICLE Interest rate hold widely expected in BoC’s latest decision. Are cuts close? – National | Globalnews.ca

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