Think you do not have a trust filing requirement? . . . Think again!
After several years of delays, the new trust filing requirements will finally begin for tax years ending after December 30, 2023. The new rules will apply to the 2023 calendar year because most trusts have a December 31st calendar year-end.
What are the new requirements?
Existing trusts that currently file an annual T3 tax return must now report additional information on all trustees, beneficiaries, settlors, and each person who can exert control or override trustee decisions over the allocation of income or capital of the trusts. The additional information to be reported on Schedule 15 includes the name, address, date of birth, tax residence, and taxpayer identification number (e.g., SIN, TN, BN) of each party.
Furthermore, all Canadian trusts that were previously not required to file a T3 return are now required to file an annual T3 trust return for the first time, even though the trust earned no income or realized gains in the year. For example, a trust that holds a non-income producing recreational property must now file an annual T3 and Schedule 15. Another example is an alter-ego or joint partner trust where the trustee did not file a T3 in the past.
The new requirements also apply to bare trusts where the trust is ignored for income tax purposes and the beneficiary reports all the trust income on their own tax return instead of a trust tax return. The bare trust requirement has caused much confusion amongst tax advisors because of the inconsistency of the income reporting by the taxpayer and the trust reporting as a separate filer.
What is a bare trust?
The CRA administratively describes 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. A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. For the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.
Could you be a trustee and not know it?
Generally, the intent to create a trust is evidenced by a signed legal trust agreement. In that scenario, it is quite clear a trust relationship exists (express trusts). However, bare trusts may not have a documented relationship. Taxpayers may be unaware they have a bare trust arrangement. Certain arrangements where individuals hold legal title to property and accounts on behalf of another person or entity may be bare trust arrangements. Brokerage accounts held in trust for minor children or nominee accounts for adults may also be bare trust arrangements. Individuals acting like a trustee with respect to the ownership and management of assets will need to examine their arrangements and discuss with their legal professionals to confirm T3 trust filing requirements under the new rules, if any.
UPDATE: CRA has released a ruling that indicates arrangements that are not trusts or deemed to be trusts under the Income Tax Act are not considered trusts for the purposes of the trust filing requirements. You may find this ruling helpful in discussions with your legal and accounting professionals.
Are there any exceptions to filing requirements?
The CRA has provided a labyrinth of narrow exceptions on its website. The rules reference exceptions for listed trusts, but depending on the trust’s activities, a listed trust may have to file a T3 return, but not have to file Schedule 15. The exception rules are so complex that some trustees may decide to file both items to avoid the massive penalties rather than pay a professional to evaluate an exception.
What are the penalties?
A new penalty may apply if a person knowingly or negligently makes a false statement or omission on a return required to be filed or fails to file a return. This penalty will be the greater of $2,500 and 5% of the highest amount of the fair market value of all the property held by the trust at any time in the year.
The CRA has acknowledged the difficulty in determining bare trust relationships and will provide relief to bare trusts by waiving the penalty payable for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline. This proactive relief is for bare trusts only and only for the 2023 tax year.
For the 2023 tax year, where the tax year of the trust ends on December 31, 2023, the filing deadline of March 30, 2024, is extended to April 2, 2024, the first business day after the deadline.
For further details and the latest information, please visit CRA’s trust webpage.
Next steps
Contact your tax accountant as soon as possible if you are a trustee of a trust that has not been filing trust tax returns annually. You must apply for a CRA trust identification number (TN) to file a trust return if your trust has never received a number.
Contact your legal professional if you are unsure an express or bare trust exists for your circumstances. Raymond James, its advisors, agents, and employees are not legal advisors and cannot determine the status of your trust. If you and your legal professional require T3 trust filings, Raymond James may be able to offer tax filing services as our resources permit. Contact your financial advisor as soon as possible to obtain a fee quote for tax filings.
This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd., (RJL). Statistics and factual data and other information are from sources RJL believes to be reliable, but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax or legal advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member - Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a Member - Canadian Investor Protection Fund.
