New trust reporting rules that were initially proposed in the 2018 federal budget are now being implemented for all trusts with taxation years ending after December 30, 2023.
These new trust reporting rules are quite complicated. This Insight provides an overview of the new rules and answers some frequently asked questions.
The big picture
In general, the key takeaways on the new trust reporting rules are:
Certain trusts are now required to file a T3 Trust Income Tax and Information Return, even if there is no income to report. Previously, trusts without income were not always required to file a return.
The new rules require more detailed information to be provided in the T3 return, including the identity of all trustees, beneficiaries, and settlors. The intent is to provide tax authorities with a clearer understanding of the trust structure and transactions.
Lifetime Beneficiary Designations
The rules introduced a reporting requirement for lifetime beneficiary designations. This means that the trust must disclose the identity of any person named as a beneficiary during the lifetime of the trust.
Additional penalties have been introduced for non-compliance with these new rules.
Question: Who is impacted by the new trust reporting rules?
Unless specific exemption conditions are met, all trusts (including ‘bare trusts’) are impacted by the new rules, and many trusts will need to file a T3 return for the first time. This holds true even if the trust generated no income or if any income earned is reported by a financial institution to the account holder.
Basically, if you answer yes to any of the questions below, it may be necessary for you to now submit a trust tax return beginning with the 2023 taxation year:
- Have you established a trust structure to own your family cottage?
- Did you create a corporation to hold title to real estate, segregating it from other properties you own?
- Have you opened an in-trust bank account for a child or grandchild?
- As a lawyer, do you have an agreement to hold client funds in trust until a transaction concludes?
- Have you or your spouse transferred an investment portfolio or other assets to a trust?
- Have you co-signed a mortgage for an adult child?
- Have you added your adult child to the legal title of your property for probate planning purposes?
- Do you have property for which the legal title is registered in only your name or your spouse’s name, but both you and your spouse retain beneficial ownership?
Note: If you are a trustee of an inactive trust, you should strongly consider dissolving it.
Question: What is a Bare Trust?
A bare trust is considered to exist when a trustee holds legal title to a trust property, but the beneficiaries of the trust hold the beneficial (real) ownership of the property. The beneficiary has complete control over the trustee’s action as it relates to the trust property and the trustee has no independent power, discretion, or responsibility over the property. It is essentially an agent-principal relationship.
Some examples of this include:
- If you have helped a child (or anyone) obtain financing by co-signing a mortgage, at which point you were added to the property’s title (allocated ownership in the official land registry system)
- If you have gifted property to a minor child (or children) who is too young to hold a legal title
- If you have added a child (or children) as an owner to your home for probate planning purposes
Note: the creation/consideration of a bare trust does not require a written agreement.
Additional information on bare trusts can be found on the CRA website.
Question: What are the exemptions to the new trust reporting rules?
The key exemptions to the new trust reporting rules include:
Date of Creation
A trust that has existed for less than three months as of December 31, 2023 is exempt from the requirement to file for the 2023 taxation year. (although the trust would need to file a return in future years if another exemption does not apply)
Value of Assets
If the maximum value of the trust assets does not exceed $50,000 at any point during the year, there is no requirement to prepare a trust return.
Type of Assets Held
If the assets consist solely of money and specific ‘exempt marketable securities’ throughout the entire year, there is no need for a trust filing.
Type of trust
Graduated Rate Estates (GRE), trusts that qualify as not-for-profit, and Qualified Disability Trusts (QDT) are the most commonly exempt types of trusts.
Question: What are examples of exempt marketable securities?
Some examples of exempt marketable securities include:
- A bank account that holds only cash
- Shares, debt, or rights listed on a Canadian stock exchange or designated foreign exchange
- Shares or units of a mutual fund corporation or trust
- An interest in a related segregated fund trust
- A debt obligation guaranteed by the Government of Canada (such as a treasury bill)
(Note: This does not include deposits insured by the Canada Deposit Insurance Corporation.)
- A debt obligation guaranteed by the government or agent of a province, or by a municipality
Question: Who is responsible for ensuring that the trust information is reported?
Usually it is the responsibility of the trustee(s) to ensure that all required trust information is reported, but other people may also be responsible. Technically, it is the responsibility of every person who has control of—or receives income, gains or profits from—the trust to provide the information in respect of the trust.
If a trustee is relying on a tax professional to complete the applicable forms, the onus is on the trustee to ensure the accuracy and completeness of the return(s).
It is the trustee’s responsibility to:
- Provide the tax professional with accurate and complete information; and
- Keep all documents, cancelled cheques and all other documents that support the reported income and deductions.
Note: the trustee may be required to prove the accuracy and completeness of the return(s) to the Canada Revenue Agency or other tax authorities.
Question: What happens if the trustee (or other responsible party) does not have the required information, or if the information is not easy to obtain?
In some instances, it may be difficult for this information to be collected. An example could be a situation where the relationships between the trustee and the settlor or beneficiaries may have soured.
The expectation from the CRA is that reasonable effort is made to obtain and report the required information, but they have not clarified what this constitutes. As such, trustees should keep detailed records of all efforts made to obtain the information.
Question: What are the penalties for non-compliance?
Substantial penalties apply if a trust return is not filed by the appointed time, or if taxes owed are not paid on time.
If there is a Balance Due:
A penalty of 5% of the unpaid tax at the time the T3 was due, along with an additional 1% of the unpaid tax for every complete month that the return is overdue, up to a maximum of 12 months, will be imposed. The penalty may increase in cases of repeated failures to file.
If there is no Balance Due:
A penalty of $25 a day will apply for each day the return is late, from a minimum of $100 to a maximum of $2,500.
Additionally, if the failure to file is done knowingly or due to gross negligence, or if a false statement or omission is knowingly made in a T3 return or under circumstances amounting to gross negligence, the penalty will be the greater of:
- $2,500; or
- 5% of the maximum value of the property held during the tax year by the trust.
S+C Partners is committed to helping you.
Our dedicated tax team and fully qualified and experienced Trust and Estate Practitioners are here to assist you Please call us at 905-821-9215 or email us at email@example.com if you have any questions or require any assistance regarding the new trust filing requirements.
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