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New Trust Reporting and Filing Rules in Canada

Last updated: Feb. 4, 2024 

The Canadian government recently passed amendments to the rules related to annual trust filing, into legislation.

Previously, some trusts didn’t have to file a yearly T3 (Trust Income Tax and Information Return). The new filing rules require that almost all private trusts, including bare trusts will now need to file a T3 Return. The new filing rules apply to tax years ending after December 30, 2023.

These amendments aim to boost transparency concerning beneficial ownership. By doing so, the Canada Revenue Agency (CRA) aims to effectively assess tax liabilities for trusts and their beneficiaries.

Failing to comply with the new reporting rules could mean facing significant penalties, including an additional gross negligence penalty.

The deadline for filing T3s for the 2023 tax year is April 2, 2024.

What is a Trust?

Trusts are arrangements where one party holds something for the benefit or use of someone else. This is not a separate legal entity, but it is a legal agreement.

People commonly used trusts in the past for tax planning. They used them to divide income, protect assets, and manage asset distribution after death.

There are family trusts (which may hold shares, assets, such as family cabins or other property), testamentary trusts (which may be used to help distribute assets in a specific way, according to a Will), and many other types including Bare Trusts.

What is a Bare Trust?

Bare trusts are types of trusts in which the trustee has no obligations except to manage the trust property on behalf of the beneficiaries.

While a “bare trust” isn’t specifically defined in the Income Tax Act, for tax purposes, it refers to a trust setup where the trustee is like an agent for all beneficiaries regarding the trust’s property.

When we say the trustee acts as an agent, it means they don’t have significant powers or responsibilities. They can’t make decisions without instructions from the beneficiaries, and their main role is holding the legal title to the property. To be considered an agent for all beneficiaries, the trustee typically needs to consult and take instructions from each beneficiary for all dealings with the trust property.

In simple terms, a bare trust involves the trustee having a minimal or passive role, focusing entirely on the beneficiary’s best interests. This type of trust is often applied in the following scenarios:

  1. Used to keep the true owner’s identity private
  2. Minimizing land transfer taxes or probate (estate) fees and expenses
  3. Used when gifting assets to a minor child
  4. Acting as a holder of legal title on behalf of a joint venture or partnership
  5. Helpful in streamlining multiple title transfers during a corporate reorganization

What are the requirements to file a T3 trust return?

If a trust lives in Canada, except for listed trusts (see exceptions below), it needs to submit a T3 Return each year if:

  1. It is an express trust, or
  2. In civil law terms, it’s a trust that isn’t established by law or judgment.

For all other trusts, both resident and non-resident, including listed trusts, a T3 Return is necessary for the tax years when the trust:

  1. Owes taxes
  2. Is asked to file
  3. Is deemed a resident trust
  4. Is based in Canada and has sold or is considered to have sold a valuable asset or has a taxable capital gain (like a main residence or shares in a corporation).
  5. Is non-resident all year and has a taxable capital gain (except from specific dispositions mentioned in subsection 150(5) of the Income Tax Act) or has sold taxable Canadian property (except from specific dispositions).
  6. Holds property covered by subsection 75(2) of the Income Tax Act
  7. Has given a benefit of more than $100 to a beneficiary for property upkeep, maintenance, or taxes, or
  8. Receives income, gain, or profit from the trust property allocated to one or more beneficiaries, and the trust has:
    • Total income from all sources exceeding $500
    • More than $100 in income allocated to any single beneficiary
    • Distributed capital to one or more beneficiaries
    • Allocated any part of the income to a non-resident beneficiary

What are the new trust reporting rules for 2023?

In general, most trusts required to submit a T3 Return, excluding listed trusts (see exceptions below), must now also disclose beneficial ownership details using Schedule 15 when filing their annual T3 Return.

Schedule 15 gathers information about all involved parties in the trust, including trustees, settlors, beneficiaries, and controlling persons (individuals with the capacity, as per the trust terms or related agreements, to influence trustee decisions about income or capital appointments). These are collectively called “reportable entities.”

  • The “settlor” (the person who contributed to the trust first – this may be a friend, lawyer, accountant, or the personal trust owner – depending on what type of trust it is)
  • The “trustees” (the parties who manage and operate the trust. For many trusts, these parties decide who gets what)
  • The “beneficiaries” (the parties who can receive income or trust property from the trust)

In addition, any party who can influence the actions of the trust must also report their private information in the trust.

For each reportable entity within the trust, the following details are necessary:

  • Name
  • Address
  • Date of birth (if applicable)
  • Country of residence
  • Tax Identification Number (e.g., Social Insurance Number, Business Number, Trust Number, or, for non-resident trusts, the identification number assigned by a foreign jurisdiction)

Filing a T3 Return also requires a trust account number. A trustee, executor, or authorized representative can apply for a trust account number online through CRA My Account, My Business Account, or Represent a Client.

Why change the filing rules? Are there any exceptions?

By implementing the new reporting rules, CRA can better collect beneficial ownership information about trusts. This will enable it to assess tax liabilities for trusts and their beneficiaries, if any.

The new rules are also intended to support the CRA’s efforts to combat tax avoidance. They align with an observed increase in reporting and disclosure requirements across most areas of tax and financial reporting.

The new reporting requirement does not apply to various types of trusts, including the following listed trusts:

  • New trusts that are less than three months old
  • Trusts that hold certain assets with a maximum fair market value of $50,000 throughout the year
  • Regulated trusts, like lawyers’ general trust accounts (specific client trusts are not exempt)
  • Trusts qualifying as not-for-profit organizations or registered charities
  • Mutual fund trusts, segregated fund trusts, and master trusts
  • Qualified disability trusts
  • Employee life and health trusts
  • Certain government-funded trusts
  • Graduated rate estates
  • Trusts with all units listed on a designated stock exchange
  • Employee profit sharing plans
  • Registered supplementary unemployment benefit plans
  • First home savings accounts
  • Registered savings plans (e.g., RRSP, RESP, TFSA, etc.)
  • Cemetery care trusts or trusts governed by an eligible funeral arrangement

Here’s an example to consider: XYZ investment trust exclusively holds stocks and bonds with a combined fair market value consistently below $15,000 throughout the fiscal year ending December 31, 2023. During this period, it generated $400 in dividends, which were kept within the trust. In this scenario, the XYZ investment trust falls into the category of a listed trust.

It’s important to note that even though the XYZ investment trust is classified as a listed trust, and thus is not required to include Schedule 15 as per the new reporting rules, it still has an obligation to file a T3 Return. This requirement arises because the trust earned more than $500 in income during the taxation year.

What are the penalties for non-compliance with the new T3 filing rules?

For the 2023 tax year and for bare trusts only, the CRA will waive the penalty payable where the T3 Return is filed after the filing deadline.

However, trustees of a trust subject to the new disclosure rules will be subject to an additional “gross negligence” penalty if they fail to:

  • knowingly or due 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 CRA demand to file a return

The new penalty will equal the greater of:

  • $2,500
  • 5% of the maximum Fair Market Value of the property held in the trust at any time in the year

The new penalty is in addition to the existing penalties for failing to file a T3 return (maximum $2,500).

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