Charities now have certainty about internal trust reporting requirements

The Canada Revenue Agency (CRA) announced in November 2023 that charities do not need to file T3 trust tax returns for their internally held express trusts. This is welcome news for the charities sector, which raised concerns about the impacts of new trust reporting requirements that passed into law in December 2022.

Background

The federal government introduced legislation to increase transparency around the beneficial ownership of trusts. The law also aims to help the CRA assess the tax liabilities of trusts and their respective beneficiaries.

The new rules are effective for trust taxation years ending December 31, 2023, and later. With that:

• Many trusts that previously did not need to file a T3 trust tax return will now need to do so.
• All trusts that are required to file a T3 trust return must also complete a new schedule and report information on all the trustees, beneficiaries, and settlors of the trust.

The new rules also carry significant penalties for non-compliance.

Potential impact on charities

Trusts that are registered charities are exempt from the enhanced trust reporting rules. Still, it was unclear for most of 2023 how the new legislation would impact the internal trusts (i.e., express trusts) many charities use to hold restricted funds for special purposes, such as endowments.

There is no exemption for express trusts under the enhanced trust reporting rules. Previous CRA policy did not require charities to file separate returns for each express trust. The charity already discloses these assets upon filing its annual T3010 information return.

A reversal of this administrative relief would require charities to file a T3 trust return for each internal express trust they hold. This would increase costs and filing requirements for charities, which can have hundreds of express trusts.

In the spring of 2023, senior officials from CRA responded to several requests for clarification. They indicated that express trusts should fall under the enhanced trust reporting rules. It did not seem to align with the intent of the new legislation.

Business as usual for charities

The CRA’s latest announcement effectively means nothing will change regarding how charities report on express trusts. Trusts that are registered charities remain exempt from the enhanced trust reporting rules. Charities will continue to disclose assets upon filing their annual T3010 information return. They do not have to file T3 trust tax returns for each internally held express trust.

After much uncertainty, this announcement is welcome news and provides relief for the charitable sector.