The legislative amendments in 2022 brought significant changes to the reporting obligations for trusts in Canada. The enhanced trust reporting rules mandate all trusts to file an annual T3 Trust Income Tax and Information Return ("T3 return") for taxation years ending after December 30, 2023. Additionally, as part of the T3 Return, all trusts are also obligated to disclose additional information such as settlors, trustees, and beneficiaries on an annual basis. With limited exception provided, the broad and comprehensive trust reporting requirements unintentionally bring in excessive filing burdens to many trusts and trustees, including bare trusts and other informal trusts. The enhanced reporting rules could apply to unexpected scenarios such as certain joint bank accounts, “in trust for” accounts, and real property with an on-title owner for financing purposes.
On August 12, 2024, the proposed income tax technical legislative amendments released by the Department of Finance (“the Finance”) provided some welcome relief and clarifications with respect to the additional trust reporting requirements. We have summarized our observations as detailed below.
Exempted express trust
Under the proposed amendments, Express trusts that are exempt from the enhanced reporting rules will be expanded to include trusts with assets valued under $250,000, as long as they meet the following criteria:
- Each beneficiary of the trust is an individual related to each trustee;
- Each trustee of the trust is an individual; and
- The total fair market value of trust assets does not exceed $250,000 throughout the year and the only assets held by the trust throughout the year are certain types of properties as listed in the legislation, including money, guaranteed investment certificate (“GIC”) issued by a Canadian financial institution, personal use property of the trust, and marketable securities such as shares, debt and mutual funds.
Additionally, smaller trusts that hold assets with a total fair market value of $50,000 or less will be exempted from the enhanced reporting rules even if those trusts have corporate trustees, or whose beneficiaries may not be an individual who is related to each trustee. The proposed amendments also remove the requirements in respect of the types of assets held by the trust.
For trust accounts used by professionals (i.e., lawyers) for specific clients, relieving provisions are available if the assets held by the trust throughout the year are money with a value of no more than $250,000. We note that the exclusion only applies to “money” and does not extend to investment contracts such as a GIC. We also note that the exception to a lawyer’s general (mixed) trust account is already available under the current legislation.
The above-proposed relief applies to taxation years ending after December 30, 2024.
Bare trusts
All bare trusts are required to file a T3 return for the taxation year ending December 30, 2023, even though the CRA provided administrative relief to the 2023 tax return filing in March 2024.
The proposed amendments introduce the concept of “deemed trust” to address bare trusts. It deems an arrangement to be a trust where one or more persons, referred to as the “legal owner,” have legal ownership of property that is held for the use of, or benefit of, one or more persons or partnerships. Each of the legal owners is then deemed to be a trustee of the trust, and each person or partnership that has the use or benefit of the property under the arrangement is deemed to be a beneficiary of the trust. The enhanced reporting rules applicable to express trusts would also apply to deemed trusts.
Exceptions will be provided to certain bare trust under the proposed amendments in respect of the T3 filing requirements, including:
- Each person or partnership that is a beneficiary of a deemed trust at any time in the year is also a legal owner of the property at that time, and there are no legal owners that are not deemed beneficiaries. This would exclude certain joint bank accounts held by family members.
- The legal owners are individuals that are related persons and the property is real property that would be used and designated as the principal residence of one or more of the legal owners for the year. This would exclude arrangements such as where a parent is on title to allow a child to obtain a mortgage.
- The legal owner is an individual and the property is real property that is held for the use of, or benefit of, the legal owner’s spouse or common-law partner during the year and would be used and designated as the legal owner’s principal residence for the year. This would exclude circumstances where spouses jointly occupy a family home, but only one spouse is on title.
- The property is held throughout the year solely for the use of, or benefit of, a partnership, each legal owner is a partner (other than a limited partner) of the partnership, and a partnership information return is filed by a member of the partnership. This would exclude circumstances where a partner (other than a limited partner) holds property for the use or benefit of the partnership.
- The legal owner holds the property pursuant to an order of a court.
The proposed amendments above apply for taxation years ending after December 30, 2025. For the 2024 taxation year, the Finance has confirmed in their explanatory notes that all bare trusts will not be required to file a T3 return.
A corporate bare trustee holding a real property would not be qualified for the above exemption.
Beneficial ownership information – Settlor
The enhanced trust reporting rules require all the trusts to disclose certain information such as settlor of the trust. The definition of settlor for the purpose of the reporting rules is broad and includes any person or partnership that has loaned or transferred property directly or indirectly, to or for the benefit of the trust, unless the person or partnership deals at arm’s length with the trust and made a loan to the trust at a reasonable interest rate, or made a transfer to the trust for fair market value consideration. This definition could capture individuals who undertook common Canadian tax and estate planning strategies, such as an estate freeze.
The new amendments narrow the definition of “settlor”, which provides that the persons and partnerships will not be considered a settlor for purposes of the enhanced reporting rules as long as they receive fair market value consideration for the transfer, irrespective of whether or not they have an arm’s length or a non-arm’s length relationship with the trust. As a result, beneficial ownership information with respect to that person or partnership would not be required to be reported to the CRA for that year.
The proposed definition would apply for taxation years ending after December 30, 2024.
GG Observations
In conclusion, the relief provisions provided in the proposed legislative amendments are welcome and encouraging, considering the heightened compliance burden for express trusts we have observed since the new enactment of the enhanced reporting requirements. Careful consideration is still necessary to identify the trusts that are subject to the proposed reporting requirements. For instance, certain types of bare trusts may be required to file T3 returns in 2025. The professionals at Grewal Guyatt can assist you in determining whether the exemptions under the new amendments apply to you and help you understand your filing obligations.
