Issue 2023-07
In brief
On December 15, 2022, federal Bill C-32, Fall Economic Statement Implementation Act, 2022, received royal assent. Bill C-32 implements the 2018 federal budget proposal that introduces new tax return filing and information reporting requirements for trusts, as well as penalties for non-compliance with these new rules. The new trust reporting rules:
- create a T3 “Trust Income Tax and Information Return” filing obligation for certain trusts and bare trust arrangements (collectively “trusts”) that do not currently have a filing requirement
- require a trust to report additional information about the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector)
- apply to certain trusts resident in Canada and non-resident trusts that are required to file a T3 return
The new trust reporting rules will apply to taxation years ending after December 30, 2023. The rules will require trustees to gather and report significantly more information, so trustees need to be prepared to meet these requirements; the filing deadline is March 30, 2024, for a trust with a December 31, 2023 taxation year end.
This Tax Insights provides details on the new reporting rules and next steps for trustees to consider.
In detail
New filing requirement
The new reporting rules are meant to improve the collection of beneficial ownership information with respect to trusts, to allow the Canada Revenue Agency (CRA) to assess the tax liability, if any, for trusts and their beneficiaries. The current reporting rules and the CRA’s current administrative position exempt certain trusts from a T3 “Trust Income Tax and Information Return” filing obligation. Generally, a trust that has no activity during the year and no income tax payable is not required to file a T3 return (e.g. a trust that holds a vacation property). However, starting with trust taxation years that end after December 30, 2023, these exemptions will no longer apply for certain Canadian-resident and non‑resident trusts.
In addition, the new T3 return filing rules will also apply to a “bare trust” arrangement, defined in the new legislation as “an arrangement where a trust can reasonably be considered to act as an agent for its beneficiaries with respect to all dealings in all of the trust’s property.” This definition is very broad and we expect that the CRA will release administrative guidance on how to practically apply this definition and how bare trustees can become compliant under these new rules.
For many trusts, the 2023 taxation year (which has a March 30, 2024 filing deadline), might be the first one for which these trusts have a filing requirement. Trustees of trusts that are required to file a trust return under the newly enacted rules, will be required to collect and disclose additional information (see below). These new filing requirements are onerous, so trustees should plan ahead of the deadline and gather all the necessary information.
New information reporting requirement
For taxation years that end after December 30, 2023, the new reporting rules will require an “express trust” (generally a trust created by a settlor during his or her lifetime or at death in a will), a non‑resident trust that is currently required to file a T3 return and a bare trust arrangement to report the name, address, date ofbirth (inthe case of an individual), jurisdiction of residence and taxpayer identification number (TIN) for each:
- settlor (this definition is very broad, as discussed below)
- trustee
- beneficiary, and
- person who has the ability to exert influence over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector) in the year
A TIN includes a social insurance number, a business number, an account number issued to a trust and, for a jurisdiction other than Canada, a TIN used in that jurisdiction to identify an individual or entity.
This information must be reported by the trust's T3 filing deadline, which is 90 days after its year end. The CRA is expected to provide further guidance and publish a new prescribed schedule. Disclosure of information that is subject to solicitor-client privilege will be exempt from these new information reporting requirements.
Definition of “settlor”
For the purposes of the new information reporting rules, the term “settlor” is defined in subsection 17(15) of the Income Tax Act (Canada). The “settlor” is a person or partnership who has loaned property or transferred property, directly or indirectly in any matter whatever, to a trust for the benefit of the trust at or before the taxation year end, but excludes:
- loans made at a reasonable rate of interest, and
- transfers made for fair market value (FMV) consideration,
by a person or partnership dealing at arm’s length at the transaction time.
For example, if a loan is made at a low interest rate, or a transfer is made for consideration that is less than FMV, toa trust or to an entity in which the trust has an interest (i.e. not dealing at arm’s length), the person or partnership that makes the loan or transfer would be considered a settlor under this definition.
As this definition is very broad, trustees should start reviewing all historical transactions since the trust settlement date to help identify potential settlor(s).
Exceptions to the new rules
The following trusts may continue to be exempt from filing T3 returns and the new additional information disclosures if certain conditions are met (i.e. no income tax payable, no taxable capital gains and no dispositions of capital property in the year):
- trusts that have been in existence for less than three months
- trusts that hold assets with a maximum FMV of $50,000 throughout the year (these assets are limited to deposits, government debt obligations and listed securities)
- lawyers’ general trust accounts
- trusts that qualify as non-profit organizations or registered charities
- mutual fund trusts, segregated funds and master trusts
- trusts, all the units of which are listed on a designated stock exchange
- graduated rate estates
- qualified disability trusts
- employee life and health trusts
- certain government funded trusts
- trusts governed by registered plans (including registered retirement savings plans and tax-free savings accounts), and
- cemetery care trusts and trusts governed by eligible funeral arrangements
Penalties for non-compliance
A new penalty will apply to a trust that is subject to the new disclosure rules if the trustees:
- knowingly or under circ*mstances amounting to gross negligence fail to file a return, make a false statement or omit required information in the return, or
- fail to comply with a demand order from the CRA to file a return
The new penalty will equal the greater of:
- $2,500
- 5% of the maximum FMV of the property held in the trust at any time in the year
This new penalty is in addition to the current penalties (maximum $2,500) for failing to file a T3 return, which will continue to apply.
Québec trust reporting rules
The Québec government, in its 2021 provincial budget, announced that the Québec tax system would harmonize with the new federal requirements fortrusts (exceptfor the amount of the new penalty). The new requirements for the Québec trust income tax return (TP-646-V) will be effective for taxation years endingafter December30, 2023 (which is the same effective date as the new federal trust reporting rules).
The takeaway
The new trust reporting rules will become effective for taxation years that end after December 30, 2023, and will place a heavier burden on trustees to gather and report information on or before the March 30, 2024 filing deadline. In many cases, it will take additional time to gather the information from various parties, particularly in cases where a trust has not filed a T3 return in the past. It is advisable to consider dissolving some dormant trusts during 2023 to minimize future compliance obligations and mitigate exposure to the new penalties; however, a dormant trust that is dissolved during 2023 will still be subject to the new trust reporting rules for its final taxation year ending December 31, 2023. Any arrangement where beneficial ownership is separated from legal ownership should be carefully analyzed to determine if it qualifies as a bare trust arrangement. Trustees should understand these reporting obligations and proactively review trust documents and the legislative wording to identify relevant parties and gather information where it is not readily available. Trustees should also apply for a trust account number as soon as possible, which gives them the flexibility to e-file the T3 return and the required information. We expect that the CRA will release additional guidance to help trustees comply with these new rules.
