New trust reporting rules

Trustees may have additional tax reporting obligations with respect to trusts they manage as of 2023

If you oversee a trust and have not been required to file T3 trust income tax and information returns with the Canada Revenue Agency (CRA) in the past, you should be aware of new federal reporting rules, which became effective in 2023.

The Government of Canada has enacted new legislation requiring trustees of certain trusts to file annual T3 returns with information disclosures. The legislation will impact most Canadian-resident and deemed-resident trusts with taxation years ending after December 30, 2023.

Under old rules, certain trusts were exempt from filing T3 returns with the CRA. These included trusts that did not receive any income, did not dispose of assets, and did not distribute capital to beneficiaries. Examples included:

• Bare trust arrangements
• Trusts holding personal-use real estate assets (e.g., cottage, vacation home); and
• Trusts holding shares of a private company, where dividends were not received and the shares were not disposed of. These structures typically arise as part of estate freezes.

The new rules come amid a growing focus globally on thwarting tax evasion and are designed to boost the transparency of trusts, among other financial structures.

What is a bare trust?

The CRA defines a bare trust as a “trust arrangement under which the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property.” In other words, the trustee of a bare trust only has legal ownership of the trust’s property and has no significant powers or responsibilities other than to deal with the property under the instruction of the beneficiaries. The beneficiaries retain beneficial ownership and control of the trust’s property and continue to be subject to income taxes on such property.

This definition could capture many planning scenarios, such as parents who add their adult children as joint owners of their investment accounts for estate planning purposes, or parents who set up “in-trust-for” accounts for their minor children. Individuals who have similar types of arrangements should seek tax and legal advice to determine whether bare trusts exist in their circumstances.

What needs to be disclosed as part of the new trust reporting rules?

The new rules require annual disclosure to the CRA, through a schedule in the T3 return, of the following details pertaining to all settlors, trustees, beneficiaries, and other persons that can exert control over a trust:

• Name
• Address
• Date of birth (if an individual)
• Jurisdiction of residence
• Taxpayer identification number (e.g., Social Insurance Number for Canadian individuals)

Are there any exemptions from these rules?

Notable trusts exclusions include:

• Graduated rate estates and qualified disability trusts
• Trusts governed by registered plans (e.g., RRSP, RESP, TFSA, FHSA)
• Trusts that have been in existence for less than three months
• Trusts that hold less than $50,000 in assets throughout the year, but only if such assets are money deposits, government debt obligations, and listed securities

What are the penalties for failure to comply with these rules?

Penalties for failing to file the T3 return start at $25 per day, with a minimum penalty of $100 and a maximum penalty of $2,500. Knowingly failing to file or gross negligence can result in additional penalties of up to 5% of the highest total fair market value of all property held by the trust in the year.

When is the first filing due date under these new rules?

The filing due date of the T3 return for a trust with a December 31, 2023 taxation year end is April 2, 2024.

Note: On March 28, 2024, the CRA announced that bare trusts are exempt from di the trust reporting requirements for the 2023 year, unless they make a direct request for the filings. This relief is for bare trusts only and only the for the 2023 year. The CRA will provide further guidance on the requirements for bare trusts in the future.

Staying “private” will no longer be an option for the majority of trusts. It is important for you to consider your involvement in any trusts and the impact of these new reporting rules.

For a more detailed explanation of this topic, contact us to request a copy of our Education Library Article: New trust reporting rules.