The new trust reporting requirements will impact many trusts that were not required to file T3 Trust Income Tax Returns in the past. According to the Canada Revenue Agency (“CRA”), the changes were implemented to “help the CRA verify that trusts, their fiduciaries, beneficiaries, and related parties have met their tax and filing obligations under the Income Tax Act.”

Summary of Changes

Under the old rules, many trusts did not have to file annual T3 income tax returns if certain conditions were met.  Generally, most trusts were not required to file unless:

• The trust had taxes payable for the year.
• The trust had a disposition of capital property in the year.[2]

Under the new rules, the exceptions from filing are significantly limited and generally, almost all trusts are now required to file a T3 return unless certain exceptions are met.  In addition, the new legislation now requires that certain information be provided on all trustees, settlors and beneficiaries of the Trust.  This information must be disclosed using new “Schedule 15” of the T3 return.

The new requirements necessitate the disclosure of the following key information about trustees, beneficiaries[3], and settlors:

• Name
• Address
• Date of Birth
• Country of Residence
• Business Number/Social Insurance Number/Other Tax Identification Number as applicable 

The new rules will also impact so called “bare” trust arrangements.  Although it is a not a defined term in the Income Tax Act, the CRA describes a “bare trust” as, “a trust arrangement in which a trustee acts as an agent on behalf of the beneficiaries in respect of all dealings with all of the trust’s property”. 

In addition, the CRA states that under a bare trust arrangement, “the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property.”

As the guidance appears to be limited to these general comments, it is unclear as to what exactly would constitute a bare trust arrangement.  However, the CRA may take the position that the following arrangements require a T3 filing[4]: 

• Arrangements under which legal title to real estate (or other assets) is held by a Corporation (or other entity) for the benefit of a separate entity (such as an individual who lives in or rents out the property.)
• Bank or investment accounts under which a parent or other guardian is named as trustee to hold funds for the benefit of children or grandchildren (“In Trust For” or “ITF” accounts)
• Arrangements where children or other eventual Estate beneficiaries are named on title for certain bank accounts, investment accounts or real estate.  This is generally done for purposes of easing estate administration.
• Arrangements where certain individuals are named as legal title holders on real estate beneficially owned by their children to assist them with obtaining a mortgage.
• Arrangements where professionals such as real estate agents, lawyers or accountants hold monies in trust for their clients[5]

Given the uncertainties associated with what constitutes a bare trust, any arrangement under which one entity holds assets for the benefit of another may be subject to reporting.  It is therefore very important that you notify us immediately if you have any of the arrangements listed above or any other arrangements that you believe may be reportable.

Exclusions

Although the rules require reporting for many situations, certain arrangements are exempt from the reporting requirements.   The following list of trusts will be exempt from the new reporting rules[6]:

• Trusts that have been in existence for less than 3 months at the end of the year.
• Trusts that held certain specific assets with a total fair market value that did not exceed $50,000 throughout the year.  Generally, these specific assets are limited to cash or near cash assets and shares listed on designated stock exchanges.
• “Graduated Rate Estates” which are Estates that meet certain criteria during the first 36 months after an individual’s passing.
• Registered Charities.

If you believe that you are the trustee of a trust that may be exempt but is not listed above, please contact us.

Penalties

The legislation provides for significant penalties that may be applicable if taxpayers fail to comply with the new trust requirements.  The penalties will vary based on the circumstances however, in some circumstances, the penalty can be as large as the greater of:

a) $2,500, or

b) 5% of the highest Fair Market Value of the trust property held in the year.

Filing Deadlines

For most trusts, the filing deadline for the 2023 T3 Return will be April 2^nd, 2024 however, the CRA has provided administrative relief to bare trusts only by waiving the penalty payable for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the April 2^nd, 2024 filing deadline. 

The CRA has stated however,  that if the failure to file the T3 Return and Schedule 15 for the 2023 tax year was made knowingly or as a result of gross negligence, a different penalty may apply which will be equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.

[1] See https://kbllp.ca/2024-tax-updates/ 

[2] Certain less common scenarios also necessitated filing in limited circumstances.

[3] The CRA has stated that generally, a beneficiary would include a person whose “right to the income or capital of the trust is immediate, future, contingent absolute or conditional.”  Therefore, information on beneficiaries whose beneficial interest is contingent on some future event must also be disclosed.

[4] This is not an exhaustive list but merely common examples.

[5] There is an exception where the professional is required under the relevant rules of professional conduct to hold funds on behalf of their client.  This exception does not apply if the funds are held in a “separate trust” maintained exclusively for a particular client.

[6] We have only listed the exemptions that we feel are most relevant to our clients.  Certain less common exemptions also exist.