As discussed in our November 10, 2022 blog, the new trust reporting and disclosure requirements have been a hot topic for tax advisors for several years. After much anticipation, the new legislation is finally effective and applies to trusts with taxation years ending on or after December 31, 2023.
The filing deadline for trusts with a December 31, 2023 year-end is April 2, 2024 (i.e., the first business day after March 30, 2024).
The new legislation now requires that most Canadian resident trusts file a T3 return, regardless of the activity for the year. Some examples of trusts that have not previously been obligated to file a T3 return, but are now subject to these new reporting requirements are as follows:
- Trusts that hold personal-use property (i.e., principal residence, cottage, vacation home); and
- Trusts holding shares of a private company, which have not reported dividends or capital gains.
Perhaps even more significant, however, is that the legislation now specifically imposes a new filing requirement for some arrangements where there may be no formal trust agreement. These arrangements are known as bare trusts which, as discussed in more detail below, may result in filing obligations for many unsuspecting taxpayers.
Summary of the New T3 Reporting Requirements
The 2023 T3 return now includes increased information disclosure which is to be documented on the new Schedule 15 – Beneficial Ownership Information of a Trust. Schedule 15 asks for details with respect to each and every settlor, trustee, beneficiary, or any person that can exert influence over trustee decisions (collectively referred to as “reportable entities”). Accordingly, the following will need to be disclosed for each “reportable entity”:
- Date of birth (individuals);
- Jurisdiction of residence; and
- Taxpayer identification number (i.e.: social insurance number, business number)
Trusts that fail to comply with the new reporting requirements and/or mandatory information disclosures may be subject to punitive penalties.
In addition to the standard failure to file penalty (up to $2,500), a new penalty has been introduced that may apply in circumstances where it is determined that a false statement or omission has been made knowingly, or in circumstances of gross negligence. This penalty ranges from a minimum of $2,500 to 5% of the highest fair market value of all properties held by the trust in the year.
New Bare Trust Reporting Requirement
As previously mentioned, the legislation now specifically imposes a new filing requirement for bare trusts. A bare trust is an arrangement where a trustee holds legal title to the trust property and can be reasonably considered to act as an agent for the beneficiaries who maintain the beneficial ownership of the property.
CRA’s guidance is that a trustee can be considered to act as agent for a beneficiary when 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
A common example of a bare trust arrangement would be a nominee corporation which owns legal title to real estate for the members of a joint venture or partnership. In this case, in addition to the T2 Corporation Income Tax Return, a T3 return will be required to provide details with respect to the trustee (i.e., nominee corporation) and settlors/beneficiaries (i.e., joint venturers/partners) for this bare trust arrangement.
However, as the definition of a bare trust is so broad, there are additional situations which appear to be captured by these new filing requirements, including (but not limited to the following):
- Addition of an adult child on bank accounts or non-registered investment accounts to provide assistance to aging parents;
- Parent(s) on legal title of real estate (with or without child) for financing purposes only; and
- “In trust for” bank accounts (i.e., bank accounts opened by a parent or grandparent for minor children).
In these situations, the individual added to the account or to legal title for property may be considered to be acting as an agent for the beneficial owner(s) of the assets/property and therefore a trustee to a bare trust arrangement. In other words, whenever there is a difference between the legal owner(s) and beneficial owner(s) of property, a bare trust arrangement may exist.
It is easy to see how this new requirement to file T3 returns for bare trusts may catch many taxpayers by surprise. CRA has attempted to address this issue by advising that they are adopting an “education-first” approach to compliance and providing proactive relief by waiving the late-filing penalty for 2023 bare trusts only where the T3 Return and Schedule 15 are filed after the deadline.
CRA, however, has also indicated that if the failure to file the bare trust T3 Return and Schedule 15 for the 2023 tax year is made knowingly or due to gross negligence, the new penalty ranging from a minimum of $2,500 to 5% of the highest fair market value of the property may apply. Accordingly, reliance on this bare trust late-filing penalty relief should be cautiously considered.
Note that a bare trust would not report any income on its T3 Return since the beneficial owner of the property is required to report any income earned or taxable capital gain realized on that property on their own tax return. Accordingly, the T3 Return for a bare trust will only be an information return with no taxes owing.
CRA has provided some additional guidance with respect to other administrative issues pertaining to the T3 filing for bare trusts including obtaining a trust identification number, naming convention for bare trusts and documents to be provided to support the bare trust arrangement. For more information with respect to these and other issues related to the new trust reporting rules, please visit this CRA website.
Exceptions to the New T3 Reporting Requirements
There are some exceptions to the new T3 reporting requirements which may provide relief depending on the situation. Some of the trust arrangements that are excluded from the new T3 reporting requirements (referred to as “listed trusts”) include (but are not limited to) the following:
- New trusts that have been in existence for less than 3 months;
- Trusts that only own certain assets (i.e., cash deposits, government debt obligations, publicly listed securities) with a fair market value that does not exceed $50,000 throughout the year;
- graduated rate estates;
- qualified disability trusts.
For a more complete list of “listed trusts”, please refer to the above noted CRA website.
For further guidance on the impact of these new trust reporting and disclosure requirements on your current situation, please contact your Welch LLP advisor.