In December 2022, legislative amendments brought significant changes to the reporting obligations for certain express trusts in Canada. The rules determining the requirement for trusts to submit an annual T3 Trust Income Tax and Information Return (“T3 Return“) have been revised for trusts with a taxation year after December 30, 2023. In particular, bare trusts, which were previously exempt from filing obligations, may now be required to file an annual T3 Return, unless certain conditions are met. As part of the T3 Return, all trusts are obligated to report additional information such as settlors, trustees, and beneficiaries on an annual basis.
Background and Pre-2023 rules
Under the Income Tax Act (the “ITA”), trusts in Canada were obligated to file an annual T3 Return within 90 days of their tax year-end. The return has to be filed if the trust owed taxes, disposed of a capital property or distributed all or part of its income or capital to beneficiaries. Prior to the 2023 tax year, there was no existing reporting obligation for Canadian trusts with no income, or for bare trusts. Personal information about trustees, beneficiaries, or settlors, was not required to be reported on the T3 Return.
Additional Reporting Requirements: What’s New?
Under the new rules, there are three primary changes.
- Every trust must file an annual T3 Return unless specific conditions are satisfied.
- The new reporting rules are applicable to bare trusts.
- Trusts that are required to submit a T3 Return must disclose beneficial ownership details for trustees, beneficiaries, and settlors. This includes personal details such as name, address, date of birth, jurisdiction of residence, and taxpayer identification numbers. Listed trusts (refer to “Exceptions”) that are required to file are not required to disclose such information.
A new beneficial ownership schedule, T3 Schedule 15, has been introduced to capture the beneficial ownership details.
A trust that is resident in Canada, other than a listed trust, is required to file a T3 return annually if it meets one of the following conditions:
- Express trust: the trust created with the settlor’s explicit intent through a trust deed or agreement.
- Civil Law Purposes: the trust is other than a trust that is established by law or by judgment.
All other trusts (resident & non-resident trusts), including listed trusts, are required to file a T3 Return for the taxation year if the trust property is subject to tax, and the trust meets one of the conditions as follows:
- has taxes payable
- is requested to file
- is a deemed resident trust
- is resident in Canada and has either disposed of, or is deemed to have disposed of a capital property or has a taxable capital gain
- is a non-resident throughout the year, and has a taxable capital gain or has disposed of taxable Canadian property (other than from an excluded disposition)
- holds property that is subject to subsection 75(2) of the ITA
- has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary’s use
- receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:
- total income from all sources of more than $500.
- income of more than $100 allocated to any single beneficiary.
- made a distribution of capital to one or more beneficiaries.
- allocated any portion of the income to a non-resident beneficiary.
A bare trust for income tax purposes refers to an arrangement where the trustee is reasonably viewed as an agent for all beneficiaries under the trust, overseeing all transactions involving the entire property held by the trust. trustee is deemed to act as an agent for a beneficiary when the trustee possesses no significant powers or responsibilities, cannot act without the beneficiary’s instructions, and functions solely to hold legal title to the property. For a trustee to be recognized as the agent for all beneficiaries, it typically requires the trust to engage and seek instructions from each beneficiary regarding all dealings with all of the trust property.
Bare trusts are now subject to the new trust reporting rules for tax years ending after December 30, 2023. Consequently, a bare trust is obligated to file an annual T3 Return unless certain conditions are met.
Similar to other trusts affected by the new reporting regulations, a trustee of a bare trust must register for a trust number.
Listed trusts are the exceptions to the new reporting requirements, which include any of the following:
- Trusts that have been in existence for less than three months
- Trusts that hold assets not exceeding $50,000 in total fair market value throughout the year where the only assets are cash, debt instruments, or marketable securities
- Certain regulated trusts, such as a lawyer’s general trust account
- Trusts that qualify as non-profit organizations or registered charities
- Mutual fund trusts, segregated funds, and master trusts
- Graduated rate estates
- Qualified disability trusts
- Employee life and health trusts
- Certain government funded trusts
- Trusts under or governed by certain registered plans such as RRSP or TFSA
- Cemetery care trusts and trusts governed by eligible funeral arrangements
CRA has provided administrative relief for registered charities with express internal trusts, exempting them from filing a T3 return for these trusts. However, no relief has been announced for non-profit organizations that are not registered charities.
Penalties for non-compliance with the new reporting requirements have been established. The penalties for failing to file a T3 return, including the Schedule 15 beneficial ownership schedule, for tax years ending after 30 December 2023 are calculated as the greater of CA$2,500 or 5% of the highest total fair market value of all the property held by the trust at any time in the year.
Let’s explore a few sample situations that are affected by new trust reporting requirements.
Case Study 1: Family trusts
A family trust was created for estate freeze purposes many years ago. Every year, the trust receives income from the shares it owns, makes distributions to its beneficiaries, and files T3 Returns.
For the 2023 T3 Return, the trustees are required to gather and report information about the trust’s settlor, trustees and beneficiaries (including corporate beneficiaries), which can usually be identified by reviewing the trust agreement.
Once the parties are identified, the trustees should obtain their information to complete the required disclosure requirements.
Case Study 2: In-trust-for (ITF) investment accounts
An individual has an investment account in trust for their minor child.
The in-trust-for account may constitute a bare trust arrangement that triggers T3 filing requirements starting the 2023 tax year. The arrangement may be exempt from filing under limited circumstances which requires, amongst other conditions, total income of less than $500 for and fair market value of the investment account of less than $50,000 throughout the year.
On another note, registered plans such as RESP’s are exempt from filing.
Case Study 3: Law firm’s trust accounts
A law firm keeps funds on behalf of its clients in trust accounts. The trust funds would constitute trust arrangements that requires T3 filings for each client.
The law firm is not required to file for clients whose funds are held in the law firm’s general trust account.
For clients whose funds are held in specified client accounts, the number of required T3 Returns can be further reduced by eliminating trust accounts that either have been in existence for less than three months or had less than $50,000 throughout the year. On the other hand, the law firm should identify trust funds that were closed during the year as they may still be subject to filing requirements.
Some client information is subject to solicitor-client privilege. In such cases, T3 Returns are still required as applicable but the information under solicitor-client privilege is not required to be disclosed on the T3 Returns.
With the new reporting rule effective for trusts with a taxation year after December 30, 2023, affected trusts must take immediate steps to gather the required information for settlors, trustees, beneficiaries, and individuals influencing trustee decisions. Careful consideration is necessary to identify trusts that were previously exempt from filing T3 returns but are now subject to the new rules. Timely compliance is crucial, as penalties for non-compliance can be substantial.
The recent legislative amendments bring a heightened compliance burden for trusts in Canada, emphasizing the importance of proactive measures to meet the new reporting requirements. The professionals at Grewal Guyatt understand the new rules and can assist you in determining if the new rules apply to your situation and what filing obligations exist.