February 20, 2024

New Trust Reporting Requirements Now in Effect May Catch Some by Surprise

The following is a guest post by Danielle Wallace, CPA, Private Client Services Senior Manager - Tax at RSM Canada LLP.

***UPDATE MARCH 28, 2024: Note that the Canada Revenue Agency released this notice on March 28, outlining an exemption for Bare Trusts, from the reporting requirements discussed below.** 

If you listen carefully, you may hear a faint buzzing noise… the sound of tax lawyers and accountants across the country preparing for the new trust reporting rules that will apply to taxation years ending after December 30, 2023. These new rules are in effect now, and will apply to trusts that previously had little to no ongoing reporting requirements – so it is worth understanding them to know if they apply to you.

Initially introduced in 2018 and passed into law on December 15, 2022, this new legislation introduces widespread changes to the trust reporting rules, including new filing requirements and enhanced reporting measures. These changes are intended to provide the CRA with more transparency around trusts, ensuring that all trusts and their related parties have met their tax obligations. The average taxpayer may be unaware of these changes and their potential impact, or unsure of how to navigate them.

T3 filing requirements

Under the previous rules, many personal trusts were not required to file a T3 return each year. Trusts that were resident in Canada for taxation years ending December 30, 2023 or earlier typically only had to file a T3 return for the taxation years where the trust had taxes payable or disposed of capital property in the year. But these personal trusts may now be caught under the new rules, which require most personal trusts resident in Canada to file an annual T3 return. Exemptions from this new requirement include listed trusts – which includes trusts in existence for less than three months during the year – and some trusts which hold less than $50,000 in certain types of assets such as cash and listed securities.

Perhaps most notably, bare trust arrangements appear to have also been caught under this new legislation. Bare trusts are generally considered to exist in principal-agent relationships where a trustee acts as an agent for all beneficiaries of the trust, in relation to all dealings with the trust’s property. Historically, bare trusts were not required to file T3 returns. There is still some uncertainty around what does and does not constitute a bare trust arrangement. Unlike an express trust, which is created with the settlor’s express intent and is usually in writing, a bare trust may not have a formal trust agreement; in many cases, especially when a formal trust agreement does not exist, the existence of a trust is really a legal question.

Common situations where a T3 filing obligation may arise for the first time include:

• Personal trusts set up for the purposes of holding a vacation property or other personal use property
• Trusts that in previous years had no income of dispositions to report, such as family trusts that own private company shares for which no dividend income is earned
• Bare trusts that hold legal title of a property on behalf of a group, such as in a partnership or a joint venture arrangement

Reporting beneficial ownership information

Previously, trusts that did file annual T3 returns were not obligated to disclose certain information about their participants. Under the new rules, all trusts who are required to file a T3 return must also disclose the identity of the trust’s settlor(s), trustee(s), and beneficiaries, as well as any person who has the ability to override trustee decisions (such as a protector). Additionally, the trust must provide the address, date of birth (if a natural person), and the taxpayer identification number for each participant. For the purposes of submitting this information to the CRA, a new schedule, Schedule 15 ‘Beneficial Ownership Information of a Trust,’ has been added to the T3 return. This schedule must be completed and filed along with the T3 return.

For some trusts, this may be a simple exercise, but for others, gathering the required beneficial ownership information may be more complicated than one would think. For example, a settlor is not limited to the legal settlor who established the trust; any persons who transfer property to the trust would also fall under the definition of a settlor of the trust and their information must be reported on the Schedule 15 (this excludes commercial lenders and arm’s length transfers). Similarly, beneficiaries are not limited to those who are entitled to the income or the capital of a trust; those with a contingent or residual interest in the trust must also be reported on Schedule 15. A contingent or residual beneficiary may be unaware that they have an interest in the trust, or may already be deceased, which could make it challenging to gather their personal information.

Penalties for non-compliance

The late filing penalty for a T3 return will remain unchanged at a rate of $25 for each day the return is late, with a minimum penalty of $100 and a maximum of $2,500. However, with these new rules come new and significant penalties to be mindful of. Failure to file a return (knowingly or due to gross negligence), omission of information and false statements may result in the assessment of a penalty equal to the greater of $2,500 or 5% of the maximum value of the trust’s assets.

The CRA has announced that it will waive late-filing penalties for bare trusts who file their 2023 T3 return after the deadline of April 2, 2024, but it is unknown how long this relief will apply.

Key takeaways:

1. These new rules represent a significant overhaul to the previous trust reporting regime
2. These changes are broad and far-reaching, with many unknowns and potential pitfalls
3. Misinterpreting or ignoring these changes could result in significant penalties

If you are unsure of how these changes may impact you, contact your tax advisor soon, to ensure a course of action ahead of the April 2 filing deadline.

NOTE: The information contained herein should not be treated by readers as legal or tax advice and should not be relied on as such. We suggest you seek professional advice for your personal situation.

Contributor:
Danielle Wallace, CPA | Private Client Services Senior Manager - Tax | RSM Canada LLP