New Trust Reporting Rules for 2023 T3 Returns

UPDATE: Bare Trusts Exempt from 2023 Trust Reporting Requirements

Overview of the 2023 Trust reporting rules

The new trust reporting tax rules, announced in the 2018 Budget, are now in effect and apply to trusts with year ends on or after December 31, 2023, with some narrow exceptions, like graduated rate estates and others highlighted later in this post. The new rules result in more trust having to file returns and provide more comprehensive information in these tax filings.

The changes create filing obligations for a lot of Trusts that previously didn’t have to file a T3 return, including a wide variety of trusts that the average Canadian wouldn’t think of as a “Trust”. Therefore, we expect that these rules will catch a lot of Canadians “off-guard” as they would have no way of knowing that they have a filing obligation (unless, of course, they follow our podcast and blog!).

The Canadian tax community has been patiently waiting for some guidance from the CRA, hopefully exempting many of these situations. Just like with the recent UHT fiasco, such guidance has yet to be provided, forcing Canadians to plan for the “worst case scenario” to avoid potential hefty penalties and interest.

On July 28, 2023, the CRA published Schedule 15 which is to be included in all 2023 T3 trust returns. This schedule requires trustees to declare beneficial ownership details under the revised trust reporting requirements. This includes personal information relating to the settlor(s), trustee(s), beneficiary(ies), and any other “controlling person(s)”.

History of the new trust reporting rules

Starting with tax years ending December 31, 2023, or later, the new framework mandates most trusts to file a T3 Trust Income Tax and Information Return every year, including those that were previously exempt for a variety of reasons, mainly when your trust did not owe tax, sell capital assets, or make income or capital distributions to its beneficiaries.

Canadians have been aware of the new reporting rules since the 2018 federal budget. The rollout of the rules was originally intended for the 2021 tax year; however, the rollout was delayed (twice). Since 2018, the draft rules have undergone several revisions. The latest revision was published on August 9, 2022, with an expected rollout for 2022 yearends. Bill C-32 was introduced on November 4, 2022, along with another deferral to December 31, 2023 trust yearends. So far, it appears as if this rollout will not be further delayed.

The aim of these changes is to gather information about various trust relationships in Canada, presumably to better arm the CRA to collect taxes on arrangements and income that may have been previously unidentifiable.

We believe the rules will be very difficult to follow in many cases and could result in the unjust application of penalties and interest levied on unsuspecting trustees. Given the substantial amendments and large penalties for non-compliance, it is critical for trustees to start preparing for the 2023 T3 filings, which are due to be filed on March 30, 2024, so very soon.

Pre-2023 trust reporting Rules

For yearends before December 31, 2023, trusts need to file a T3 return if they owe taxes, sell capital assets, or distribute income or capital to beneficiaries within the tax year. The filing deadline is within 90 days post the trust’s fiscal year-end (most trust yearends are December 31 of each calendar year). Prior to these new rules, Trusts were not required to disclose settlor, trustee, or beneficiary details to the CRA.

T3 Trust Guide – 2022 – Canada.ca

New Trust reporting rules

The new rules apply to trust tax years that end on or after December 31, 2023 and apply to “express trusts”; meaning trusts residing in Canada and non-resident trusts that file T3 returns. Express trusts are typically created intentionally and documented, however they can be created unknowingly and without any documentation in lots of cases, as you’ll see below. Furthermore, the new legislation also considers “bare trust” applicable for these rules.

Penalties for not filing, or not providing the required information 

Failure to file a T3 penalties start at $100 and increase by $25/day to a maximum of $2,500.

The new rules apply a new (hefty) penalty for failure to file or provide the required information knowingly or due to gross negligence. This penalty ranges from $2,500 to 5% of the maximum fair market value of the property of the trust at any point during its fiscal year.

2023-12-01 Update from the CRA’s FAQ section: The CRA will provide relief to bare trusts by waiving the penalty payable under subsection 162(7) for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline. For the 2023 tax year, where the tax year of the trust ends on December 31, 2023, the filing deadline of March 30, 2024, is extended to April 2, 2024, the first business day after the deadline.

This proactive relief is for bare trusts only and only for the 2023 tax year. 

However, if the failure to file the T3 Return and Schedule 15 for the 2023 tax year was made knowingly or due to gross negligence, a different penalty may apply. This penalty will be equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.

What is a bare trust?

A regular trust is a legal arrangement where trustee (an individual, a corporation, etc..) holds legal title and exercises control over the trust’s property, which is held for the benefit of the beneficiaries. As the beneficial owners of the trust’s property, beneficiaries can be allocated income and capital from the trust, according to the terms of the trust, which the trustee must follow.

A bare trust is a trust where the trustee (an individual, a corporation, etc..) holds legal title of the trust’s property, however the beneficiaries control, and effectively own the trust’s property and report income and losses from the property (if any) on their tax returns. This is a ‘principal-agent’ type relationship because the beneficiary has complete control over the trustee and how they handle the trust’s property.

Bare trusts are used for a variety of purposes, including:

• Ensuring privacy and anonymity of the beneficiaries (a key target of the government).
• Minimizing land transfer taxes in provinces like British Columbia.
• Minimizing probate fees in some provinces.
• Effectively managing the transfer of property in the course of corporate reorganizations.
• Giving or gifting the property minor children who can’t legally hold title to that property.
• Holding legal title on behalf of a group of owners, commonly done in real estate and development joint-ventures.

Some surprising examples of bare trust arrangements

Surprisingly, a lot of different types of bare trust arrangements exist, and you might not even be aware that you are a party to one. Therefore, you are also likely not aware that you may be subject to the new trust reporting rules. Some surprising examples that may be caught by the new rules:

• You’ve added your child (or someone else) to the title of your home in order to reduce probate fees or for other estate planning purposes, however you retain beneficial ownership of the home.
• You’ve added your child (or someone else) to your bank or investment account(s) in order to reduce probate fees or for other estate planning purposes, however you retain beneficial ownership of the account(s).
• You’ve co-signed on your child’s mortgage, because they do not have sufficient credit to qualify for the mortgage on their own, and as a result you’ve ended up on title to their house.
• You purchased your vacation property in a “Bare Trust Company” in order to avoid future land transfer tax on eventual sale of the property.
• You’ve acquired a vacation property “Bare Trust Company” from someone else .

These are just a few of the surprising examples where the new rules might apply. It is important to connect with your tax adviser to understand if you have reportable bare trust arrangements that you might not be aware of.

Exemptions from the new trust reporting rules

• Trust that are less than three months old.
• Trust holding less than $50,000 (throughout the entire year) in any combination of:
  • Deposits (i.e. cash) 
  • Government debt obligations (i.e. government bonds)
  • Listed securities.
• Mutual fund trusts, segregated funds, and master trusts.
• Trusts, all the units of which are listed on a designated stock exchange.
• Trusts governed by registered plans, like First home savings accounts.
• Employer profit sharing plans.
• Lawyers’ general trust accounts.
• Graduated rate estates (which are most Canadian estates within 3-years of the person’s death).
• Qualified disability trusts.
• Trusts that qualify as non-profit organizations or registered charities.
• Employee life and health trusts.
• Some government-funded trusts.
• Cemetery care trusts and trusts governed by eligible funeral arrangement.
• Some information that is covered under solicitor-client privilege.

New trust reporting requirements

Who are “Reportable entities”

Affected trusts have to report the personal information of all “reportable entities” including trustees, beneficiaries, settlors, and individuals with significant control over the trust’s decisions.

Expanded definition of “settlor”

IMPORTANT: The definition of “settor” (for these purposes) is incredibly broad and includes anyone who has loaned or transferred property to the trust directly or indirectly at any point in the trust’s existence. Determining who a settlor is under these expanded definitions will be very difficult for trustees.

To understand who is a settlor of a trust, the trustee(s) must review all of the transactions of the trust back to its inception, potentially decades of transactions. In the podcast noted above, we explore if someone paying the expenses of a trust and then being reimbursed by the trust makes them a “settlor” under the current legislation (short answer – probably).

The CRA has yet to provide guidance as to how they will apply this expanded definition of “settlor” in practice and the specific circumstances where it would not impose a penalty for failing to identify all settlors (under this expanded definition) of the trust.

Personal information required from “reportable entities”

Once a trustee has identified all parties to the trust, they must (at risk of a hefty penalty) gather and report each of these party’s:

• Full name
• Date of birth
• Social Insurance Number
• Address
• Country of Residence

The first-year reporting is going to be quite onerous for a lot of trustees as it will require them to go to great lengths, in some cases, to gather lots of personal information which the parties to the trust may not be willing to give up, thereby placing a trustee in a “catch-22” position of having to delay filing (penalty imposed) or file with incomplete data (potential penalty imposed).

The CRA has yet to provide guidance as to specific circumstances where it would not impose a penalty for failing to provide all of this information in a trust’s return.

Tips to get ready for 2023 Trust reporting rules

Trustees, or anyone who suspects they might be a trustee, should:

• Consult a tax adviser to determine if, in fact, a trust arrangement (documented or not) exists and if it falls under the new trust reporting rules.
• If you know a trust arrangement exists, review the trust deed and other incorporating documents to begin to identify all the “reportable entities”.
• Review all the transactions that took place in the trust during its entire existence to identify any “settlors” who may have loaned or transferred property to the trust directly or indirectly, and add them to the “reportable entities” list.
• Reach out to all the identified “reportable entities” and gather their personal information. Keep specific logs about each correspondence. If a reportable entity will not suppy their information, you may need to defend your position that you didn’t “knowingly” exclude information from schedule 15, and that you were not grossly negligent in failing to report it.

CRA website and FAQ

You can find more information about the 2023 Trust reporting rules on the CRA’s website, including a handy FAQ that is being updated regularly, here New trust reporting requirements for T3 returns filed for tax years ending after December 30, 2023 – Canada.ca.

GET HELP! The new trust reporting rules are very complicated, and can be extremely difficult to comply with. Find a trusted adviser who can guide you through the process.