Is a Lawyer's Trust Account a Bare Trust for CRA Reporting in Canada?

Professionals, agents and nominees often hold money or property for someone else. You might wonder whether that makes the arrangement a bare trust that has to be reported to the CRA.

There is no simple yes or no. The test looks at the role of the legal owner, and a set of exceptions can remove an arrangement from the rules. This article explains the test in plain terms.

This article covers Canadian federal tax law, which applies in every province.

What the law looks at

Under s. 150(1.3) of the Income Tax Act, an express trust includes an arrangement where a legal owner holds property for the use or benefit of others and can reasonably be considered to act as their agent. The legal owner is deemed a trustee and the users or beneficiaries are deemed beneficiaries.

The CRA describes a reportable bare trust as an express trust where a legal owner can reasonably be considered to act as agent for the beneficiaries. This includes an arrangement that would not otherwise be considered a trust under the Act.

The label used in the arrangement is not the whole story. A person described as a nominee, agent or custodian may or may not fit this test, depending on the facts.

How a bare trustee differs from a regular trustee

A trustee generally qualifies as an agent, a bare trustee, when the trustee has no significant powers, cannot act without the beneficiary's instructions, and only holds legal title. The beneficiary is the beneficial owner and the trustee is the legal owner.

In a regular trust, the trustee holds and manages property under a trust document with real powers and duties, and the trust files its own T3.

Exceptions that may apply

The deemed-trust rule does not apply in a number of cases listed in s. 150(1.31). The ones most relevant to funds held for another include the following.

• Every beneficiary is also a legal owner and no legal owner is a non-beneficiary, such as a joint bank account held by family members for the use and benefit of each of them.
• Property held by a registered securities dealer or a regulated trust company that issues an information return to all beneficiaries.
• Property a court order requires the legal owner to hold.
• Property held solely for a partnership by its partners, where a partnership return is filed.
• Certain real property held by related individuals or spouses where it would be a principal residence.

Whether a lawyer's trust account, an accountant's client account or an agent's holding arrangement fits one of these exceptions depends on how the money is held and for whom. It is not safe to assume either result.

Privilege and what reporting involves

The reporting provisions in s. 150(1.1) to (1.3) do not require disclosure of information covered by solicitor-client privilege.

If an arrangement is a reportable bare trust, the trust reporting rules apply for taxation years ending on or after December 31, 2026. Schedule 15 then asks for the name, address, date of birth for individuals, country of residence and tax identification number of all trustees, settlors, beneficiaries and controlling persons. Income, capital gains and capital losses from the trust property should be reported on the beneficial owner's tax return.

What to do next

• Identify who holds legal title and who benefits from the property.
• Ask whether the legal owner can act without instructions or has real powers over the property.
• Check whether any exception above fits, and keep records of why.
• Note that the CRA does not give definitive determinations on whether a trust exists.
• Speak with a lawyer or accountant before the first reporting year ends, since the facts decide the outcome.

Frequently asked questions