The Details
Bare Trust Reporting – Deferred to Another Year
While trusts are typically created through formal legal documentation, such as a trust deed, bare trust reporting measures are broad and capture many informal arrangements where ownership and legal title to property are separate. These measures require providing the Canada Revenue Agency (CRA) with information about the bare trust; they do not change how these arrangements are taxed.
The existence of a bare trust depends on the facts of each situation. Indicators of a bare trust include: an intention to hold assets as agent for another party (whether documented or not), a gratuitous transfer of property to joint ownership, or a difference between the beneficial ownership (i.e., the true rightful owners versus those holding legal title). It is common for property, such as non-registered investments and real estate, to be held in joint name, even when not all joint holders contributed to the property or are beneficial owners. Scenarios that could create a bare trust arrangement include: an adult child being added to title of their aging parent’s home, a parent transferring non-registered investments to a joint account with their adult child, or a parent being added to title of their child’s home to assist with mortgage qualification.
Bare trust filing obligations were initially enacted in 2022, with reporting requirements beginning in the 2023 taxation year. Bare trusts would have needed to file a T3 Return disclosing information about all parties involved, but the true owner of the assets would still report income, losses, and gains as before. The bare trust filing obligations were waived on short notice for the 2023 and 2024 taxation years.
Budget 2025 defers bare trust reporting implementation for the 2025 taxation year, with intent to apply it in the 2026 taxation year. This provides another temporary reprieve from compliance burdens. Clients should use this deferral period to examine whether their arrangements qualify as bare trusts, assess whether any new exceptions apply, and prepare for eventual reporting requirements.
Budget 2025 also indicates the government’s intention to move forward with the previously proposed expansion of the "listed trust" or "small trust" exception, proposing to increase the reporting threshold exception from $50,000 to $250,000 in total fair market value of trust property held throughout the year. The list of qualifying assets that a trust may hold to benefit from this exception has also been broadened.
If the trust meets the exception conditions, its holdings do not exceed the $250,000 threshold, and those holdings are limited to the specified asset types throughout the year, the trust is exempt from the enhanced bare trust reporting requirements for that year.
Restrictions on Indirect Trust-to-Trust Transfers
In Canada, most trusts are deemed to dispose of their capital property for tax purposes every 21 years. This “21-year rule” can create a significant capital gains tax liability if the trust property has appreciated substantially, even though no actual sale occurs and no cash is generated to pay the tax. The rule ensures that capital gains tax cannot be indefinitely deferred across generations. While a trust may continue beyond 21 years, it faces a deemed realization of gains at fair market value and must have sufficient liquidity to pay the associated tax.
Existing legislation prevents taxpayers from avoiding the 21-year rule by transferring property to a new trust before the anniversary. The legislation ascribes the old trust’s 21-year anniversary to the new trust, ensuring the tax liability cannot be postponed.
Budget 2025 proposes further anti-avoidance measures to prevent taxpayers from sidestepping the rule by rolling property out of the old trust to a beneficiary corporation owned or controlled by another trust. Any property transferred directly or indirectly on or after the Budget Date to a new or other trust will inherit the original trust’s 21-year deemed disposition date, ensuring taxpayers cannot circumvent the 21-year rule in this manner. This may also signal this government’s future priorities in actively targeting tax deferral techniques involving trusts.
A common approach to dealing with the 21-year rule, whereby trustees distribute (or "roll out") assets with inherent capital gains to Canadian resident capital beneficiaries before the trust’s 21st anniversary, remains viable, with careful planning.
Repeal of Underused Housing Tax
The federal Underused Housing Tax (UHT) took effect on January 1, 2022, aiming to discourage non-resident, non-Canadian owners from holding vacant or underused residential property in Canada by imposing a 1% annual tax on the property’s value. The current government determined this policy objective can be adequately addressed through other measures, including the federal foreign homebuyer ban and various provincial and municipal vacancy and speculation taxes.
Budget 2025 proposes to eliminate the UHT; no UHT will be payable and no returns will be required for 2025 and subsequent calendar years. However, all UHT obligations remain in force for 2022, 2023, and 2024. Clients who may have been uncertain about their filing obligations, particularly those involved in complex ownership structures, should review their past years’ compliance carefully.
Proceeding with Previously Announced Alternative Minimum Tax Measures
The Alternative Minimum Tax (AMT) is a parallel tax system intended to ensure that individuals and most trusts pay a minimum level of tax, even when deductions, exemptions, or credits significantly reduce their regular tax liability. If the AMT calculation results in a higher amount than the regular tax, the higher AMT applies. However, AMT paid can generally be carried forward for up to seven years and used to offset future regular tax, when sufficient regular tax arises. Recent changes increased the AMT rate to 20.5% and raised the individual exemption to $177,882 for 2025.
Budget 2025 confirms that additional previously proposed measures will move forward, including limiting the deduction of investment counsel and management fees to 50% for AMT purposes, compared to full deductibility under pre-2024 rules.
These changes are most likely to affect high-income individuals, those realizing large capital gains, and taxpayers who claim significant deductions or credits, such as from flow-through shares, resource expenses, or large charitable donations. Trusts with substantial income or capital gains may also be impacted, particularly when planning strategies rely on deductions or credits that are now less effective under the AMT regime. Given the increased complexity and broader application of the AMT, clients should carefully review their tax planning strategies.
Proceeding with the Lifetime Capital Gains Exemption Increase
Budget 2025 confirms the previously announced increase to the Lifetime Capital Gains Exemption (LCGE), which will raise the exemption to $1.25 million for eligible capital gains. This exemption can substantially reduce tax on the sale of qualifying small business corporation shares and qualifying farm or fishing property. Strict ownership and use tests apply to determine eligibility, making careful planning essential.
Consolidation of Qualified Investment Rules for Registered Plans
Budget 2025 proposes changes to the rules governing what investments can be held in registered plans, including RRSPs, RRIFs, TFSAs, RESPs, RDSPs, FHSAs, and DPSPs, to streamline and simplify the rules and make them clearer and more consistent plan types.
Notably, Budget 2025 proposes to allow Registered Disability Savings Plans (RDSPs) to invest in shares of certain small businesses, bringing them in line with other registered plans. However, after January 1, 2027, registered plans will no longer be able to invest in shares of "eligible corporations" or interests in small business investment limited partnerships and trusts, though existing holdings will be grandfathered.
Budget 2025 also eliminates the need for certain investment funds to register with the CRA by introducing two new categories of investment funds that automatically qualify, making it easier for clients to invest in a broader range of funds. Additionally, the qualified investment rules for most registered plans will be consolidated into a single, unified definition, and the list of permitted investments will be reorganized for clarity.
For private clients, these changes mean it will be easier to understand what investments are allowed in their registered accounts, reduce the risk of inadvertently holding non-compliant investments, and potentially provide more investment options, especially for those using RDSPs or looking to invest in private funds. However, clients should review their portfolios before 2027 to ensure any investments that will no longer qualify are addressed, as new purchases of certain small business-related investments will be restricted.
Partial Repeal of Luxury Tax
The federal Select Luxury Items Tax Act was introduced as part of Budget 2021 and came into force on January 1, 2022. It applies to the sale or lease of certain high-priced goods: vehicles and aircraft priced over $100,000, and marine vessels priced over $250,000 (subject to various exclusions and exemptions). The tax was calculated as the lesser of 10% of the purchase price, or 20% of the amount above the applicable price threshold.
The tax faced criticism for its potential negative impact on Canada’s manufacturing sector and for generating relatively modest revenue relative to its policy objectives. Budget 2025 proposes to repeal the luxury tax on aircraft and vessels/boats for transactions after the Budget Date, but unfortunately, it will continue to apply to vehicles valued over $100,000.
Top-Up Tax Credit
Budget 2025 introduces a non-refundable Top-Up Tax Credit, proposed for the 2025 to 2030 taxation years, to help alleviate the reduction in value of tax credits for certain taxpayers. Most non-refundable tax credits are calculated at the lowest federal personal income tax rate, which drops from 15% to 14.5% in 2025 and to 14% in 2026 and later years.
The value of tax credits will also decrease, potentially resulting in a higher tax bill for individuals with large credits, such as tuition, medical expenses, or credits for dependents. The Top-Up Tax Credit maintains the 15% rate for credits claimed on amounts above the first income tax bracket threshold, so taxpayers with significant credits are not subject to a higher overall tax burden due to the rate change.
Automatic Tax Filing for Some Taxpayers
Budget 2025 introduces the Automatic Federal Benefits for eligible lower-income individuals with simple tax situations who have not filed on their own, allowing the CRA to automatically file tax returns on their behalf. Before filing, the CRA will send a prefilled return for review, allowing the taxpayer 90 days to confirm or amend. If no response is received, the CRA will proceed to file the return and issue a notice of assessment. As this measure focuses on individuals with lower income and straightforward tax filings, it may be particularly relevant to family members, including those with university-aged children, who should be aware of this new measure and the ability to opt out.
Limits on Dividend Refunds for Private Corporations
When a private Canadian corporation earns “passive” investment income such as interest, dividends, rental income, royalties, or taxable capital gains, it generally pays tax at a high flat rate similar to top personal tax rates. However, much of this tax can later be refunded when the corporation pays taxable dividends to its shareholders. This refund mechanism recognizes that shareholders will also pay tax on dividends they receive.
When the shareholder is another private corporation with a later fiscal year-end, this can create a tax deferral. The lower-tier corporation receives its refund immediately when it pays the dividend, while the upper-tier corporation does not have to pay its own refundable tax until its later balance-due date.
For example, if a holding company with a June 30 year-end pays a dividend to a parent corporation with a December 31 year-end, it can recover refundable tax in time to reduce its tax payment due on August 31. The parent corporation will eventually pay refundable tax on the dividend, but not until its tax is due the following February 28. With more layers or more staggered year-ends, this deferral can become significant.
Budget 2025 proposes to curtail this deferral in tiered corporate structures where the corporations are affiliated (generally meaning they are controlled by the same individual or by spouses). Under the proposal, the lower-tier corporation would not receive its tax refund until the upper-tier corporation has paid taxable dividends, effectively aligning the timing of the tax.
This change introduces further complexity to an already technical area of the rules governing passive investment income earned in private corporations. The measure would apply to corporate taxation years beginning on or after the Budget Date.
Capital Gains Rollovers for Eligible Small Business Shares
Budget 2025 confirms that the government intends to proceed with several previously announced tax measures, with some adjustments based on consultations and further analysis. The capital gains rollover measures would allow investors to defer tax when they sell eligible small business shares and reinvest the proceeds into new eligible small business shares within a prescribed timeframe.
The 2024 Fall Economic Statement proposed several changes to make this rollover easier to access for dispositions occurring in 2025 or later, including allowing preferred shares to qualify, increasing the qualifying asset limit for eligible small business corporations from $50 million to $100 million, and extending the reinvestment deadline from 120 days to one year. These changes aim to provide greater flexibility for reinvestment in Canadian small businesses.
Employee Ownership Trusts
The Employee Ownership Trust (EOT) rules are intended to help employees acquire ownership of a business by allowing the trust to borrow from the business and repay over an extended period, while also providing retiring owners with a longer deferral period for capital gains. A temporary exemption is available on up to $10 million in capital gains realized on sales to an EOT for the 2024 to 2026 tax years. Budget 2025 confirms that the government will proceed with additional amendments to clarify eligibility conditions and adjust how the capital gains deduction is calculated.
How We Can Help
The federal budget introduces numerous technical changes that may impact your tax and estate planning strategies.
Our Tax and Estate Planning team is here to help you navigate these changes and understand how they may affect your specific situation. We work alongside independent legal and tax professionals who can provide tailored advice and implementation support. Together, we ensure you have the right team in place to make informed decisions that align with your family's long-term goals.
Contact your Mawer Investment Counsellor to see how we can help.
