New Trust Reporting Rules – Are You Ready?
New Trust Reporting Rules – Are You Ready?
Find out more about the new federal trust reporting rules which would increase disclosure requirements, and what you can do to prepare for them.
For the 2023 tax year, the CRA provided all bare trusts with an exemption from the requirement to file a T3 return unless the CRA makes a direct request for these filings.
In August 2024, the Department of Finance released draft legislation on trust reporting. This includes measures to exempt bare trusts from T3 filing for taxation years ending December 31, 2024 –– and to more concisely define a bare trust for T3 and the related beneficial ownership reporting for tax years ending December 31, 2025, and later. These changes remain in proposed status and have not been introduced to parliament as of the date of this update.
Find out more about the new federal trust reporting rules, which will increase disclosure requirements, and what you can do to prepare for them.
Trusts have been a staple in tax and estate planning, providing flexibility, control, and asset protection. Trust arrangements come in many forms and are tailored to serve a variety of specific purposes.
Proposed legislation that significantly expands trust reporting requirements was first introduced in 2018, for taxation years ending on or after December 31, 2021.
These amendments are primarily intended to increase transparency regarding beneficial ownership and assist the Canada Revenue Agency (CRA) in properly assessing the tax liabilities for trusts and their respective beneficiaries. The CRA disclosure requirements are concurrent with the introduction of the Quebec Nominee Agreement disclosure requirement and the enactment of British Columbia’s Land Owner Transparency Act. Collectively, they signal a significant movement toward increased disclosure and transparency, where previously some degree of privacy had been afforded.
A revised version of the rules was passed into law on December 15, 2022, and will apply to taxation years ending after December 30, 2023. This means trusts with a December 31 year end will be subject to these rules starting with their 2023 taxation year.
What’s new?
T3 filing requirement
Under the old rules (which apply to taxation years ending December 30, 2023, or earlier), a trust resident in Canada is generally not required to file an annual T3 income tax return unless the tax is payable by the trust for the year, or the trust disposes of capital property. The CRA had provided further administrative relief where only nominal income was earned by a trust or allocated to Canadian-resident beneficiaries.
The new rules drastically limit these broad exceptions. Most personal trust residents in Canada will now be required to file an annual return even where there is no income tax liability, and the trust made no distributions or allocations during the year. Trusts that include an arrangement where the trust can reasonably be considered to act as an agent for its beneficiaries, commonly known as ‘bare trusts’, will be expressly subject to the new reporting requirements.
Limited exceptions continue to be provided for trusts which:
- have been in existence for less than three months at the end of the year; or
- hold less than $50,000 in assets throughout the taxation year (provided their holdings are confined to cash, certain debt obligations, and listed securities)
MNP Insight:
Private company shares are not listed securities. Consider a common situation where a family trust holds private company shares: even where the family trust receives no dividends from the private company, it will still be required to file a trust return every year under these rules.
Types of trusts specifically exempted from this new reporting requirement include:
- Regulated trusts such as lawyers’ general trust accounts (note that trusts maintained separately for specific clients are not included in this exemption and are subject to the new filing requirement);
- Trusts that qualify as not-for-profit organizations or registered charities;
- Mutual fund trusts, segregated fund trusts, and master trusts;
- Qualified disability trusts;
- Employee life and health trusts;
- Certain government funded trusts;
- Graduated rate estates;
- Trusts with all units listed on a designated stock exchange;
- Employee profit sharing plans;
- Registered supplementary unemployment benefit plans;
- First home savings accounts;
- Registered savings plans (i.e., RRSP, RESP, TFSA etc.); and
- Cemetery care trusts or a trust governed by an eligible funeral arrangement.
Bare Trusts
Extension of the new rules to bare trusts is significant. Whether a bare trust arrangement exists is a legal determination. These arrangements often cannot be easily identified from financial statements or existing income tax returns.
Trusts created to hold only personal-use assets for estate planning or asset protection purposes that may have qualified previously for the filing exception will no longer qualify under the new rules.
Many bare trust arrangements, such as those commonly used in joint ventures, real estate holdings, or probate planning, that were previously not subject to T3 reporting requirements will now have to consider the additional costs of compliance.
In early 2024, the CRA announced administrative relief for 2023 bare trust T3s where the T3 return and new T3 Schedule 15 are filed after the filing deadline (April 2, 2024). Note this is not an extension of the 2023 filing deadline; rather, the CRA will provide relief by waiving late-filing penalties. There is currently no indication on what the deadline is in order to receive the administrative relief from penalties. The waiver of penalties does not apply in situations where failure to file was made knowingly or due to gross negligence.
In March 2024, the CRA further that a gross negligence penalty will only apply “in the most egregious cases where a bare trust fails to file”. This type of penalty would be imposed only in the context of a compliance action (e.g. an audit) where all factors and circumstances of the taxpayer’s particular situation are considered together.
Additional information requirements
The previous prescribed T3 forms and schedules required only limited information regarding the parties to the trust.
Under the new rules, every trust that is required to file a T3 return must disclose information on new T3 Schedule 15 (Beneficial Ownership Information of a Trust) that includes the name, address, date of birth, jurisdiction of residence and taxpayer identification number (TIN) (i.e., social insurance number, business number, trust account number or foreign TIN) for each:
- trustee;
- beneficiary;
- settlor; and
- each person who has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust.
MNP Insight:
A ‘settlor’ for purposes of the new disclosure extends beyond the person who established the trust and will likely include non-arm’s length persons who participated in an estate freeze in favour of a trust, sold property or loaned money or property to the trust, or paid expenses on behalf of the trust.
To the extent that accounting records for the income and capital of the trust have not been maintained, it will be prudent to start now so that all relevant transactions that could give rise to additional settlors are identified.
Is your business ready for anything?
Non-compliance penalties
The existing penalties for failure to file a T3 return by the due date continue to apply. Likewise, failure to distribute and file any trust-related information slips will also continue to attract the usual late-filing penalties.
The new rules add to the list of potential penalties. A false statement, omission, or failure to file a return (knowingly or under circumstances amounting to gross negligence) could result in a penalty equal to the greater of $2,500 or five percent of the highest fair market value of the trust assets during the year.
MNP Insight:
This penalty applies regardless of the magnitude of an error or omission in the required disclosures. Accordingly, it is critical that persons required to file under the new trust reporting rules can demonstrate they have acted with reasonable care in meeting the new reporting and disclosure requirements.
Quebec trust reporting
The new trust reporting rules will also apply for Quebec purposes for taxation years ending after December 30, 2023. Revenu Quebec will assess its own penalties for non-compliance.
Are you ready?
Many trusts will be required to file for the first time and information not previously required will now have to be ascertained and disclosed.
Taxpayers should work with advisors to identify trust arrangements with non-active assets or personal-use assets, as well as bare trust arrangements, as they will likely be subject to the new trust reporting requirements. Trustees are encouraged to begin assembling the requisite information now if they have not already started. For some arrangements, gathering the necessary information will be relatively straightforward. For others the task may be more onerous, and failure to comply will attract harsh penalties.
MNP Insight:
Additional considerations may be considered for (1) trust arrangements which no longer serve their intended purpose (i.e., winding up the trust), and (2) if the trust is approaching its twenty-first anniversary (i.e., accelerating the planning for that event due to the increased reporting) .
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