Do you need to file a trust return for 2023? You might feel tempted to stop reading after seeing that question if you have never had to file a return for your trust in the past. You might not even think that you are involved with a trust. But if you continue reading, you will be informed that many trusts that have never required trust filings in the past now require them. You will also learn that many arrangements that were disregarded by Canada Revenue Agency in the past are now considered trusts that require trust filings. At a high level, a trust is an arrangement where the legal title owner is different from the beneficial owner, regardless of whether the trust entity was created. Do you have a bank account for a minor child? Have you co-signed a mortgage? These are scenarios that may be considered a trust arrangement requiring a trust return.
Due to new legislation, significantly more trusts and estates will be required to file tax returns for 2023. As well, trusts now have significantly more disclosure requirements. Trusts with a December 31, 2023, year-end will be the first to be affected by these rules. Because of this, it is vital to identify trusts previously exempt from filing a T3 return that now require a return and to gather the additional information that will need to be reported on trust tax returns.
Why were these rules put in place?
The expanded trust reporting rules are part of the government’s efforts to enhance transparency and improve the collection of beneficial ownership information. This aligns with international efforts to counter tax evasion and aggressive tax avoidance. The new rules will result in the filing of many more trust returns and more detailed information to be reported by trusts, which the government believes will assist in these efforts. Unfortunately, these rules could potentially penalize taxpayers who either are unaware that they own a trust, or who think that they are compliant as they are unfamiliar with the new rules.
What are the types of trusts that will now require trust filings?
Tax returns will be required for all Canadian resident express trusts that do not meet at least one of several exceptions. An express trust is created voluntarily by the settlor while still alive. A sampling of these exceptions includes the following types of trusts:
- Has been in existence for less than three months at the end of the year.
- Holds only certain prescribed assets such as cash and publicly listed shares with a total fair market value not exceeding CAD$50,000 throughout the year.
- Qualifies as a nonprofit organization described in paragraph 149(1)(l) or is a registered charity. Internal trusts held by registered charities are also excluded.
- Is listed on a designated stock exchange.
- Is a mutual fund trust, master trust, or segregated fund listed on a designated stock exchange.
- Is a graduated rate estate, qualified disability trust, or an employee life and health trust.
- Is governed by various pension, profit sharing, and registered plans, such as RESPs or RPPs.
Noticeably absent from the exclusions are “bare trusts”. These are informal trusts in which the trustee has no obligation other than to deal with the trust property as instructed by the beneficiaries. The trustee holds legal title, but the beneficiary has beneficial ownership. A bare trust technically can be something as simple as a parent owning a bank account for a child, or an individual owning real estate for the benefit of someone else. These types of arrangements are very common, and there will likely be many taxpayers who will require T3 filings for the first time. A complication regarding bare trusts is that the current forms are not yet designed to report trusts of this nature. Hopefully, more guidance regarding bare trusts will be provided. Fortunately, CRA has indicated that they plan to waive late filing penalties for bare trusts that are submitted after the filing deadline. If you have questions regarding whether an arrangement might require a T3 filing, please contact us.
There will also no longer be an exclusion for several common situations, such as trusts with no tax payable or no dispositions of capital property. For example, a trust that only held cash of $60,000 and earned no income during the year will now be required to file a trust tax return. Trusts holding material property with little to no income such as trusts holding personal property or certain estate freeze trusts will also now be required to file trust returns. The removal of these exemptions will result in many first-time T3 filings.
What is the additional reporting that will be required?
According to the 2018 Budget, all non-resident trusts that currently must file a T3 return and express trusts that are resident in Canada, with some exceptions as referred to above, would need to provide additional information annually. The other reporting requirements include the following:
- The identity and prescribed information for all trustees, beneficiaries, and settlors of the trust.
- Information must also be included for beneficiaries that cannot yet be named. For example, for children or grandchildren not yet born.
- Contingent beneficiaries must also be reported.
- The definition of settlor has been expanded to include parties that made a non-arms length loan or transfer of property for the benefit of the trust. Arm’s length loans or transfers must meet certain criteria to avoid the expanded definition of settlor.
- The identity of any person who may exert influence over trustee decisions regarding the allocation of income or capital based on the trust terms or a related agreement. A common example would be a “trust protector”.
- Prescribed information includes the name, address, date of birth (if an individual), residency, and taxpayer I.D. number.
- T3 Schedule 15, Beneficial Ownership Information of a Trust, has been added to the T3 return to report this additional information.
- Certain indigenous groups have simplified disclosure requirements and unit holders listed on a designated stock exchange are not subject to these additional reporting requirements. Information protected by solicitor-client privilege need not be reported.
We recommend that trust owners with a December 31, 2023, year-end start gathering the required information immediately, to avoid stress at the March 30, 2024, filing deadline. If you have any questions, please reach out to us.
What are the penalties for non-compliance?
The standard penalty for failure to make the T3 filing and disclosures on time equates to $25 per day, to a maximum of $2,500, along with further penalties on unpaid taxes. There are also gross negligence penalties for taxpayers required to file because of the new rules which equate to the greater of $2,500 or 5% of the highest total fair market value of the trust’s property at any time during the year. These penalties would apply to any person or partnership subject to the new trust filing rules. This penalty would also apply if false statements were made, or information was purposefully omitted from the return. As mentioned above, CRA plans on waiving the penalties regarding bare trusts, but will not waive the penalty for “regular” trusts where they believe the taxpayer did not file either by choice or because of gross negligence. As such, there is the risk of significant penalties for those who are non-compliant.
Price & Comin LLP is here to help.
If you have any questions regarding how these new rules might apply to you, or if you would like assistance with trust filings, please contact us.
Recent Comments