If you or your spouse co-signed a mortgage with your child or grandchild to allow them to qualify for a home purchase and went on the title of the home, you likely have a “bare trust” arrangement. If so, you must file a bare trust tax return for the 2023 tax year and future years. It is being on the title with your child that creates the bare trust arrangement. 

A bare trust is not the type of trust where a lawyer is sought to create it. Often, it can happen accidentally, like co-signing a mortgage. It’s when someone legally owns an asset as is the case if you go on title with your child, but the home technically belongs to your child. You have legal ownership, but you aren’t the one entitled to that property or the income or gain. The only responsibility you have is to transfer the property when demanded.

The technical definition of a bare trust from the Canada Revenue Agency (CRA) is available here. Bare trusts occur when you legally own an asset because you have some percentage of legal title of the trust property, but your child enjoys the benefits of ownership. The arrangement is a separation of legal and beneficial ownership of a property.

Even though there is no tax on the trust’s value, if Canadians don’t file their bare trust returns by the April 2nd deadline (before the general April 30th tax deadline for individuals), they could face multiple fees or penalties. The fee is $25 per day for late filing, with a minimum penalty of $100 and a maximum of $2,500. If CRA suspects gross negligence in filing, they can assess the greater of $2500 or 5% of the trust’s property which can be significant.

NOTE: The CRA recently announced that given the unfamiliarity of this for most Canadians, they will offer relief from the penalty and only go after real blatant cases of gross negligence for 2023. Great news!

While that announcement was a sigh of relief, you still need to file the bare trust tax return. You may have to pay someone every year to file the T3 Trust Income Tax and Information Return and a Schedule 15 Beneficial Ownership Information of a Trust. The new reporting requirements can be found here.

Co-signing a mortgage for your child or grandchild remains an excellent way to help them get on the homeownership ladder. But this new consideration may give some pause. Keep in mind that there is no tax to be paid, just an annual filing requirement.  If you want to discuss the pros and cons of co-signing a mortgage, speak with Mississauga’s best Mortgage Broker, Joe Purewal. Joe will have a frank conversation about the benefits and drawbacks and discuss other available strategies to help your child or grandchild achieve their homeownership dreams.