Budget 2018 announced the government’s intention to introduce new trust reporting rules. The proposed changes were introduced through various releases of draft legislation from 2018 to 2022. The legislation received royal assent on December 15, 2022 and became law. The new rules will require more trusts to file income tax returns and disclose additional information. These rules, while being introduced with the intention of ensuring effectiveness and transparency to assess trusts, are onerous in nature and have created a major burden for the taxpayers to gather detailed information about their trusts. Taxpayers and advisors should prepare to comply with these rules.
What are the changes?
Under the old rules, a trust was only required to file a T3 Trust Income Tax Return (“T3 return”) if it had tax to pay for the year, it disposed of capital property or it distributed all or part of its income or capital to beneficiaries.
The new rules expand the filing requirement to include trusts that were not required to file T3 returns in the past. For the 2023 taxation year, the filing requirement applies to all “express trusts” resident in Canada and non-resident trusts that are required to file under the old rules. The exemptions from filing under the old rules noted above will no longer apply. As a result, a trust that holds a cottage of vacation property for example, will be required to file even though it has no income tax payable for the year. Furthermore, the new filing requirement also applies to bare trust arrangements where the trust is acting as an agent for its beneficiaries. The most common example is a nominee corporation holding legal title to real property in trust for the beneficial owners of the real estate. However, the broad definition of bare trust included in the new rules could also capture in-trust bank accounts (common with elderly parents and minor children) where an individual is holding a bank account in trust for someone else and arrangements where someone cosigns a mortgage and is on title for the property in trust for the beneficial owner.
Exclusions
Some types of trusts are exempt from filing, including:
- Trusts that have been in existence for less than 3 months at the end of the year; or
- Trusts that hold less than $50,000 in assets throughout the taxation year.
- Lawyers’ general trust accounts
- Trusts that qualify as non-profit organizations or registered charities
- Mutual fund trusts, segregated funds and master trusts
- Trusts, all the units of which are listed on a designated stock exchange
- Graduated rate estates
- Qualified disability trusts
- Employee life and health trusts
- Certain government funded trusts
- Trusts governed by registered plans (including registered retirement savings plans and tax-free savings accounts), and
- Cemetery care trusts and trusts governed by eligible funeral arrangements.
New Disclosure Requirements
Under the new rules, every trust (other than exceptions noted before) is required to file a T3 return and every trust filing a return must disclose the following information – the name, address, date of birth, jurisdiction of residence and taxpayer identification number (TIN) (i.e., social insurance number, business number, trust account number or foreign TIN) for each:
- Trustee;
- Beneficiary;
- Settlor (A ‘settlor’, as per the new rules, extends beyond the person who established/settled the trust. The expanded definition referenced in the legislation includes a non-arm’s length person/(s) who participated in an estate freeze, sold property or loaned money or property for the benefit of the trust, or paid expenses on behalf of the trust. However, there are exclusions for loans made at reasonable rates of interest or transfers made at FMV by a person dealing at arm’s length); and
- each person who has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust (such as a protector).
The CRA released Schedule 15 Beneficial Ownership Information of a Trust, which trustees need to complete and file to report beneficial ownership information under the expanded reporting rules.
Due date & Penalties
Every trust return is due 90 days after the calendar year. For 2024, the returns would be due by March 30, 2024, however since March 30 falls on Easter weekend, the return is due April 2, 2024.
The new penalties applicable to trusts that are required to file returns as per the new rules would apply to the trustees, if they:
- knowingly or under circumstances amounting to gross negligence fail to file a return, make a false statement, or omit required information in the return, or
- fail to comply with a demand order from the CRA to file a return.
This new penalty will equal the greater of:
- $2,500
- 5% of the maximum FMV of the property held in the trust at any time in the year.
This new penalty is in addition to the existing failure to file penalties.
Penalty Relief – Bare Trusts
The CRA has provided relief for penalties to bare trusts that may be uncertain about the new requirements. The relief is provided by waiving the penalty under subsection 162(7) for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline. However, the relief is not available if failure to file was made knowingly or due to gross negligence.
Taxpayers and advisors should be aware that if they have multiple bare trusts, it would be prudent to file the returns for most of their bare trusts and only late-file the returns where they have no information or information is not easily available. The CRA has specifically noted that gross negligence penalties would be applicable where the taxpayers/advisors did not file the returns despite having the information.
Challenges to consider:
- Although the primary intention of the new rules is to ensure transparency, these new changes would result in first time filing obligations for a number of Canadian trusts.
- The most significant change has been the inclusion of Bare Trusts to file T3 returns. This is true especially for trust arrangements used for real estate holdings or joint ventures, where the nature of the trust arrangements is not easily identifiable. Where a bare trust is a corporation, the corporation will now need to file a T3 return in addition to their T2 return filing obligation. In addition, where a trust arrangement has been entered into solely for probate planning purposes, the trustee will now require to file a T3 return under this law.
- Another challenge would be in identifying instances where children hold properties in trust for their parents or vice versa or where a company holds property in trust for the shareholder or vice versa including but not limited to cases where they do not have any formal trust arrangement documents filed, would now also need to file the returns.
- There is also an interplay between the UHT filings and the new T3 filings. Taxpayers who filed their UHT returns as trustee of the trust holding real estate in April of 2024, would need to file the trust returns as well since CRA already has details for their filing obligations.
Resources
New rules for trust reporting are coming for 2023 returns – CPA Canada
The information in this article is of a general nature and is in summary form. Contact one of our tax professionals to discuss these matters in the context of your situation before acting upon such information.
