The proposed new trust reporting and disclosure requirements have been a hot topic for tax advisors since they were first introduced in the 2018 Federal Budget. The purpose of this proposed new legislation is to provide the Canada Revenue Agency (“CRA”) with more information with respect to the relevant parties to a trust agreement as well as assist with the assessment of potential tax liabilities for trusts and their beneficiaries.
Currently, trusts that do not earn income or make distributions are not required to file a T3 return. The new legislation will require that most Canadian resident trusts file a T3 return, regardless of the activity for the year. In addition, the T3 return will include increased information disclosure requirements.
The implementation date for these new trust reporting and disclosure requirements has been a moving target. However, on November 4, 2022, the proposed legislation was re-issued in Bill C-32 and is now expected to be effective for taxation years ending after December 30, 2023 (i.e., December 31, 2023 year-end). The first applicable filing deadline for these trusts will be March 30, 2024.
Increase in T3 return filing requirements
Some examples of trusts that have not previously been obligated to file a T3 return, but will be 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.
The revised legislation also 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 acts as an agent for the beneficiary who maintains the beneficial ownership. Some examples of bare trust arrangements may include:
- Nominee corporation that owns the legal title to real estate for the members of a joint venture;
- Addition of an adult child on bank accounts or non-registered investment accounts to provide assistance to aging parents;
- “In trust for” bank accounts (i.e., bank accounts opened by a parent or grandparent for minor children).
Note that there are some exceptions to the new reporting requirements including (but not limited to):
- New trusts that have been in existence for less than 3 months;
- Trusts that only own certain assets (i.e., deposits, government debt obligations, listed securities) with a fair market value less than $50,000 throughout the year;
- graduated rate estates;
- qualified disability trusts.
New disclosure requirements
The new requirements will necessitate the disclosure of personal information with respect to various reportable persons associated with a trust.
Specifically, the following details with respect to each and every settlor, trustee, beneficiary, or any person who can exert influence over trustee decisions (i.e., protector) will need to be disclosed:
- Name;
- Address;
- Date of birth (individuals);
- Jurisdiction of residence; and
- Taxpayer identification number (i.e., social insurance number, business number)
The definition of a settlor for this disclosure is based on a more extensive provision of the Income Tax Act and includes both the original legal settlor as well as anyone who transfers property to the trust (except for a commercial loan or fair market value transfers by an unrelated party).
For beneficiaries, the proposed legislation states that the required information must be provided for those whose identity is “known or ascertainable with reasonable effort.” Beneficiaries are usually specifically listed in the trust deed; however, it may also provide for a class of beneficiaries (i.e., any future children or grandchildren of the current beneficiaries). In this case, the details of the terms of the trust that extend to this class of “unknown” beneficiaries must be disclosed.
Penalties
In addition to the standard failure to file penalties (i.e., $25 per day late, for a minimum of $100 and maximum of $2,500), a new penalty has been introduced in this legislation.
This new penalty may apply in circumstances where it is determined that a false statement or omission has been made knowingly, or in circumstances of gross negligence. The new penalty will be determined as the greater of:
- $2,500; and
- 5% of the highest fair market value of all properties held by the trust in the year.
Recommendations
Although the proposed legislation for the new trust reporting and disclosure requirements has not yet received Royal Assent, it is expected that it will apply to trusts with taxation years ending after December 30, 2023 (i.e., December 31, 2023 year-end). Accordingly, we advise continuing to take a proactive approach to prepare for these new reporting and information disclosure requirements.
Specifically, as the new rules will apply to most trusts existing at any time in calendar 2023, we recommend taking the following steps prior to December 31, 2022:
- Review organizational charts to identify any trusts that have not previously been required to file a T3 return;
- Identify all bare trust arrangements that may potentially have filing requirements;
- Consider winding-up inactive trusts that no longer serve a relevant purpose;
- Review trust deeds and consider the possibility of removing and/or changing trustees or beneficiaries (assuming no negative tax consequences) to avoid unnecessary disclosure of information to CRA; and
- Begin obtaining required information with respect to all reportable persons for continuing trusts.
For further guidance on the impact of these new trust reporting and disclosure requirements on your current structure, please contact your Welch LLP advisor.
