The Bare Trust Nobody Knew They Had Created

The situation

Raymond and Fiona run a small independent insurance-adjusting practice out of Woodstock, splitting claims work between them as self-employed contractors for several insurers. Their accountant handles the business return every spring, and for years that was the extent of their tax dealings — nothing unusual, nothing that required a lawyer. That changed when their accountant, working through a checklist on new trust reporting obligations, asked an offhand question: did they hold title to any property besides their own home?

They did. Four years earlier, their daughter Tharshini had bought a house in Woodstock. Her income at the time, on its own, was not enough for a lender to approve the mortgage she needed, so the lender asked for a co-signer with title on the property as security. Raymond and Fiona went on title alongside her — a common enough favour between parents and an adult child. Tharshini made every mortgage payment, covered every expense, and treated the home as entirely hers. Her parents never lived there, never collected rent, and never expected to receive a cent from it. They signed some paperwork at the time, largely at their lender's direction, and had not thought about it since.

Their accountant's question was really about a legal concept most people never encounter: a bare trust, an arrangement where someone holds legal title to property while another person holds all the beneficial interest in it — the right to use it, profit from it, and eventually receive the value of it. Raymond and Fiona held legal title. Tharshini held everything else. That split, whether anyone intended it as a trust or not, is what the law treats as one.

What the review found

For most of Canadian tax history, a bare trust like this one attracted no special filing obligation. Trusts generally file an annual return, but bare trusts — where the trustee has no real powers or duties beyond holding the name on title — were long treated as exempt in practice, since they had no income or activity of their own to report. Raymond and Fiona's accountant knew that had changed: recent years brought expanded trust reporting requirements aimed at giving the Canada Revenue Agency visibility into exactly these kinds of arrangements, including a requirement to identify every trustee, beneficiary, and settlor. Bare trusts were swept into that broader net for the tax year in question, with only narrow exemptions available.

Raymond and Fiona did not qualify for an exemption. The requirement had applied to them for that year, and the deadline had already passed by the time their accountant raised it. They had missed a filing they did not know existed, for a trust they did not know they had created, involving a property they had never lived in or profited from.

Our team's tax lawyer reviewed the mortgage documents, the title history, and a signed statement from Tharshini confirming she alone had paid for and used the property throughout. The facts were straightforward and, importantly, sympathetic: this was a family accommodating a lender's request, not an attempt to shelter income or obscure ownership. But sympathy is not a defence on its own. The return was late, and the potential consequences were serious enough to take seriously.

Two separate penalties applied to the missed filing. The first was a late-filing penalty that applies regardless of intent, calculated by the day the return remained outstanding — modest on its own, but capable of adding up. The second was far larger: a penalty tied to a percentage of the trust property's value, reserved for cases where the Canada Revenue Agency treats a false statement or omission as having been made knowingly or through gross negligence. Applied to a home worth several hundred thousand dollars, that second penalty alone could have run into six figures — placing the family's total exposure somewhere in the range of roughly $50,000 to $150,000 depending on how the filing was ultimately characterized and how much interest had accrued by the time it was resolved.

What we did

1. Established the facts before approaching the Canada Revenue Agency. We gathered the mortgage agreement, the lender's correspondence requesting a co-signer, Tharshini's payment history on the property, and a clear written account of why Raymond and Fiona went on title. This built a record showing an accommodation arrangement, not a deliberate attempt to hide beneficial ownership from tax authorities.
2. Filed the overdue trust return as a voluntary correction rather than waiting to be caught. The Canada Revenue Agency treats a taxpayer who comes forward before being contacted very differently from one who is discovered through an audit. We prepared and filed the outstanding trust return promptly once the gap was identified, framing the submission around the family's own initiative rather than any external prompt.
3. Argued against the gross-negligence penalty specifically. The late-filing penalty is close to unavoidable once a deadline has passed, but the much larger penalty requires a finding of knowing or grossly negligent conduct. We made the case, supported by the paperwork, that Raymond and Fiona had no reason to believe a routine co-signing arrangement from years earlier had suddenly become a reportable trust — and that they corrected the omission themselves as soon as they learned of it.
4. Negotiated the scope of the resolution before it hardened into an assessment. Once a formal reassessment issues, reversing a penalty becomes a matter of formal objection and possible appeal — slower, more adversarial, and less certain. We engaged with the Canada Revenue Agency while the file was still open to a negotiated outcome, rather than letting the process run its default course.
5. Advised on unwinding the arrangement going forward. Beyond the immediate filing, we discussed removing Raymond and Fiona from title now that Tharshini's income supported the mortgage on her own, closing off the recurring reporting obligation for future years rather than leaving the family to repeat this process annually.

The outcome

The Canada Revenue Agency accepted the voluntary nature of the filing and agreed the larger, value-based penalty was not warranted on these facts. It was not waived outright — the family still faced the standard late-filing penalty, along with interest that had accrued while the obligation sat unrecognized, together landing well under $10,000. Set against the six-figure exposure the gross-negligence penalty could have created, it was a compromise both sides could accept: the Canada Revenue Agency secured a filed return and an acknowledged obligation, and the family avoided a penalty scaled to the value of a house they never benefited from.

Raymond and Fiona also moved forward with removing themselves from Tharshini's title later that year, once her lender confirmed her income now qualified for the mortgage independently. That closed the underlying trust relationship entirely, so no further annual filing will be required on their end.

The case did not end with a clean win, and our team was candid with Raymond and Fiona about that from the outset. A penalty was paid. Months were spent corresponding with the Canada Revenue Agency and assembling records for an arrangement made half a decade earlier. None of that would have been necessary had the filing gap been caught before the deadline rather than after — which is precisely the outcome the firm now tries to prevent for other clients in similar positions.

What you can learn from this