Cosigners Become Bare Trusts Automatically
The Canada Revenue Agency (CRA) has introduced new filing requirements for individuals who have co-signed a mortgage, leaving many wondering what this means for them. If you're in this situation, here's a breakdown of the changes and how they may impact you.
What Does It Mean to Be a Co-Signer?
A co-signer is someone who takes on shared responsibility for a loan, alongside the primary borrower, to help them qualify for financing. This is common when the borrower, such as a family member or close friend, does not meet the lender’s requirements on their own. As a co-signer, you're legally responsible for the mortgage if the primary borrower defaults.
What Is a Bare Trust?
When co-signing a mortgage, you may hold a small percentage of ownership in the property, often just 1%, to help the primary borrower meet requirements. This arrangement is known as a "Bare Trust," where you are a legal owner of the asset but hold it for the benefit of someone else.
The New CRA T3 Filing Requirements
The CRA now requires co-signers to file a T3 tax form to report any income earned from co-signed mortgages. Previously, co-signers had no reporting obligations in such scenarios. Under the new rules:
1. Income Reporting
Co-signers must report income generated by the co-signed property, such as interest, dividends, or other forms of income. Even if no income is earned, you are still required to file Schedule 15 (Beneficial Ownership Information of a Trust) as part of the T3 tax form.
2. Filing Process
To comply, you'll need to gather detailed financial information about the property. This includes annual statements and tax documents from the primary borrower or the financial institution managing the mortgage
3. Complexity and Deadlines
Filing a T3 form can be complex. It’s advisable to consult a tax professional to ensure accuracy and avoid errors. The deadline for submitting the T3 form is April 2, earlier than the general April 30 tax return deadline. Missing the deadline can lead to significant penalties, although the CRA may offer leniency for 2023 filings.
How to Stay Compliant
So far this isn’t looking positive for the new changes to be beneficial, but let’s look at the impact of the rest of change, specifically the fact that it’s based on the weekly rates. Consider a scenario where a home buyer(s) seeks a pre-approval. Based on the median rate stress test they are pre-approved for a $565,000 mortgage. Fantastic, they are all excited and head out with their realtor to look at homes. After some searching they put in an offer, then there’s a little bit of back and forth negotiation but they end up with an accepted offer at the price they can afford. Based on their purchase price and down payment, they will need a mortgage for $562,000 and they were pre-approved for $565,000 so they’re looking good, right? Unfortunately during the time of their pre-approval and their offer being accepted, the weekly median rate had changed and now they only qualify for a mortgage of $558,000. They don’t have any additional money to put down and are faced with having to cancel their offer. So how farfetched is this scenario? It’s in fact very realistic, a stress test that can be this responsive to market changes has the potential to leave a lot of buyer in this very situation and cause significant disruption to real estate market with properties being conditionally solid just to go back on the market when the deal falls through.
Consequences of Non-Compliance
Failing to file the T3 form or reporting inaccurately can result in penalties or even audits. While the CRA might waive penalties for the first year under specific circumstances, repeated non-compliance or gross negligence can lead to severe consequences.
Ongoing Obligations
These requirements aren’t a one-time obligation. Co-signers must report income from the property every year moving forward. Staying organized and informed will help you avoid future complications.
Key Takeaways
The CRA’s new T3 filing requirements place additional responsibilities on co-signers of mortgages. Here's a summary:
- Co-signers must report all income generated by the co-signed property using a T3 tax form.
- Filing is mandatory, even if no income is earned.
- Deadlines are stricter, with penalties for late or unfiled forms.
- Consulting a tax professional is highly recommended for accurate compliance.
By understanding these new obligations, gathering the right information, and filing correctly, you can navigate these changes with confidence and avoid potential pitfalls.
About the Author: Sadiq Boodoo is the Principal Broker of Approved Financial Services. Sadiq has over 24 years banking and financing experience and studied Management and Economics at the University of Toronto.