New Trust Reporting Requirements
The new rules, which include comprehensive disclosure requirements, also apply to bare trusts and other informal trust and agency relationships that were in existence at any time during the 2023 calendar year.
The new requirements have very broad application and will capture many common commercial arrangements even when no tax or income reporting is at stake.
For trusts impacted by these requirements, the first filing deadline under the new rules is 30 March 2024.
T3 return filing and additional information reporting are now required on an annual basis for express trusts (i.e., trusts that are created with the settlor's (any person or partnership that has loaned or transferred property, directly or indirectly in any manner whatever) express written or verbal intent, as opposed to other trusts arising by operation of law) that are resident in Canada or deemed resident in Canada, subject to certain exceptions (see below), effective for tax years ending on or after 31 December 2023. Therefore, the new rules increase the compliance burden for existing trusts and create an annual T3 return filing requirement for many trusts that were previously not required to file a T3 return.
Under the new rules, trusts subject to the additional reporting requirements must report and disclose the following information for each trustee, beneficiary and settlor of the trust, as well as any person who has the ability, as a result of the trust terms or a related agreement, to exert influence over trustee decisions regarding the allocation of trust income or capital in a year (e.g., a protector of the trust):
Name
Address
Date of birth, in the case of an individual other than a trust
Jurisdiction of residence
Taxpayer identification number
Bare trusts
One of the most significant changes is that the new reporting requirements also apply to so-called "bare trusts." A bare trust includes an arrangement in which the trust can reasonably be considered to act as agent for its beneficiary(ies) with respect to all dealings in all the trust's property.
The CRA states that a trustee can reasonably be considered to act as an 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.
Such trusts are specifically included in the new trust reporting rules, even though they do not have beneficial ownership of the property to which they have legal title.
Where a bare trust, or nominee, is a corporation, the corporation will be required to file both a T3 trust return and a T2 corporate income tax return.
The application of the new reporting rules to bare trusts is significant. Bare trusts are commonly used in many types of personal and commercial arrangements, such as joint ventures and real estate holdings, and can easily be overlooked because prior to the new reporting rules, tax filings for bare trusts were generally not required. Note that the new rules pertain only to trust reporting and do not change the income tax treatment of bare trusts.
As an example, if your clients added their child(ren) to title of their house to simplify estate administration and minimize probate fees, without transferring any beneficial interest, these clients would be subject to the new trust reporting rules. Similarly, if your clients were added to title of their children’s house (without any beneficial interest) to help them qualify for a mortgage, they would now have to report this arrangement on a T3 return.
Another common arrangement that can be considered a bare trust and subject to these rules is when your clients have an ITF account set up for their child or grandchild.
A new beneficial ownership schedule (T3 Schedule 15 Beneficial Ownership Information of a Trust) has been added to the T3 return that will require your clients to provide certain information for all trustees, beneficiaries (including contingent beneficiaries) and settlors of the trust.
A bare trustee corporation acts as the title holder to an asset for the benefit of someone else, such as holding the title to investments in a nominee corporation; this arrangement is often used in real estate development, oil and gas and resource exploration, or general estate and probate planning
An individual holds an "in trust" bank or investment account for a child or a parent
A parent corporation holds cash in trust for underlying subsidiaries (i.e., certain corporate "cash sweep" arrangements)
A general partner, typically a corporation, in a limited partnership arrangement is the title holder to the underlying assets of the partnership; this arrangement is typically used in real estate investments, but may also include business operating partnerships
An individual has purchased a property "in trust," but the actual owner is not clearly identified; this arrangement is commonly used with real estate purchases or certain pooling of private investments where the title holder or purchaser is not the true underlying economic or beneficial owner of the property
An individual is registered on the title of any real estate that they do not beneficially own (e.g., a named interest on a child's or parent's home for estate planning purposes)
Foreign Trusts
Under the new rules, most trusts that are either "factually resident" in Canada or "deemed resident" in Canada (discussed below) must now file a T3 return every year, regardless of whether the trust has tax payable in Canada or disposed of any property, with limited exceptions.
As discussed below, foreign trusts may be subject to these new rules if one or more of the following apply:
A person who is, or was, a resident of Canada transferred or loaned property to the trust.
A Canadian resident is a beneficiary of the trust.
The trust holds taxable Canadian property.
The trust carried on business in Canada in the year.
Certain trusts will be exempt from the new reporting requirements, including:
Trusts that have been in existence for less than three months at the end of the year
Trusts that hold CA$50,000 or less in cash or designated near-cash assets throughout the year
Certain estates
Deemed resident trusts
The new rules apply not only to trusts that are factually resident in Canada but also to trusts that are deemed resident in Canada.
A trust will generally be considered factually resident in the jurisdiction where the central management and control of the trust actually takes place. However, certain otherwise-nonresident trusts may nonetheless be deemed resident in Canada and subject to tax in Canada on part or all of their worldwide income. The deemed resident trust rules are complex and require careful analysis of all the facts and circumstances surrounding a trust. Broadly speaking, a trust is deemed to be resident in Canada where there is either a "resident contributor" or a "resident beneficiary."
A resident contributor is a Canadian-resident person who has made a "contribution" to the trust. "Contribution" is broadly defined to include a wide variety of scenarios, including certain direct and indirect transfers and loans to the trust.
For example, consider an individual, Mrs. A, who currently lives in the United States (US) but is planning to become resident in Canada for tax purposes. Prior to becoming resident in Canada, Mrs. A made a contribution to a US trust. At the time Mrs. A becomes a resident of Canada, the US trust will have a resident contributor and will be a deemed resident trust from the beginning of the year in which Mrs. A became a Canadian resident for tax purposes.
A "resident beneficiary" is generally a Canadian-resident person who is, at a given time, a beneficiary under a trust and that has a "connected contributor" at that time. A "connected contributor" is generally a person who made a contribution to the trust, either while resident in Canada or within 60 months of moving to or leaving Canada.
For example, consider an individual, Mr. B, who lives in Canada with his children but is planning to move permanently to the US. If within 60 months of leaving Canada, Mr. B establishes a US-domiciled trust for the benefit of his Canadian-resident children, that trust will be deemed resident in Canada from the beginning of the year in which Mr. B made a contribution to the US trust.
Trust account numbers and due date of return
Prior to making a T3 trust return filing for the first time, it will be necessary to first apply for a trust account number. This can be done online using one of three CRA services:
My Account.
My Business Account.
Represent a client.
In addition, the form T3APP can be used to apply for a trust account number by mail.
The trust return is due 90 days after the end of the calendar year. In 2024, 90 days after December 31, 2023, is March 30. However, as March 30, 2024, falls on the Saturday of Easter weekend, the returns will be due on Tuesday April 2, 2024, which is the next government business day.
Penalties
New penalties have been introduced for failing to file a T3 return (including the Schedule 15 beneficial ownership schedule) or failing to provide required information on a T3 return if the omission was made knowingly or was due to gross negligence. These new penalties can be severe and are equal to the greater of CA$2,500 and 5% of the highest total fair market value of all property held by the trust in the year, with no maximum penalty.
Exceptions from the additional reporting
Certain types of trusts are excluded from these additional reporting requirements under new subsection 150(1.2), including trusts that:
Have been in existence for less than three months at the end of the year (and due to the "year" referencing the calendar year, interpreted as being in existence for less than three months during the year)
Hold only money and certain other designated financial assets that have a total fair market value that does not exceed CA$50,000 throughout the year
Note: It is generally understood that guaranteed investment certificates (GICs) do not constitute "money" for purposes of the Act, and therefore investments in GICs would not otherwise qualify for the reporting exclusion.
Have all of their units listed on a designated stock exchange
Are mutual fund trusts
Are themselves registered charities or not-for-profit organizations (NPOs); however, it is important to note that charities and NPOs may have certain bare trust arrangements that may themselves have to report and file
Note: On 10 November 2023, the CRA announced it will provide administrative relief from the requirement to file a T3 return for express internal trusts held by registered charities,7 but the CRA has not extended such relief to trusts associated with an NPO or generically for bare trust arrangements in which a registered charity may participate.
