For taxation years ending on or after December 31, 2023, trusts have expanded reporting requirements.
Previously, a trust resident in Canada generally only filed a T3 return if it had tax payable, disposed of capital property or made a distribution to its beneficiaries during the year. Disclosure of personal information was limited to beneficiaries that received an allocation of income or capital.
Under the new rules, there are three main changes:
- All trusts, unless certain conditions are met, are now required to file an annual T3 return1;
- Trusts that are required to file a T3 return, other than listed trusts (see below), must report additional beneficial ownership information when filing their annual T3 return by completing Schedule 152.
- Arrangements where a trustee can reasonably be considered to act as an agent for its beneficiaries, commonly known as bare trusts, are subject to the new reporting requirements.
On December 1, 2023, the Canada Revenue Agency (CRA) published a list of frequently asked questions (FAQ)3 that will be updated with additional questions and answers as they become available.
Which trusts are now required to file a T3 return?
There are a number of conditions that result in a requirement to file a T3 return, as outlined in FAQ 2.1.
Added to the list of conditions is a trust that receives any income, gain or profit that is allocated to one or more beneficiaries and 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, or
- allocated any portion of the income to a non-resident beneficiary.
Which trusts are required to include Schedule 15 with their T3 return?
FAQ 2.2 indicates that except for listed trusts, generally every trust that is required to file a T3 return is required to provide the additional beneficial ownership information by completing the new Schedule 15, which is a part of the T3 return package.
What is a listed trust?
FAQ 2.3 provides an extended list of trusts exempt from the additional disclosure requirements, including trusts:
- that have existed for less than 3 months;
- with holdings valued at no more than $50,000 throughout the year, holding assets restricted to money, bonds, publicly traded securities, mutual funds or segregated funds. Gold or silver coins are not exempt;
- that are a Graduated Rate Estate (GRE) or a Qualified Disability Trust (QDT).
T3 Schedule 15 – Beneficial Ownership Information of a Trust
Schedule 15 asks for information on settlors, trustees, beneficiaries and any person who can exert influence over trustee decisions regarding allocating income or capital. The CRA requires the name, address, date of birth, country of residence and tax identification number (i.e., social insurance number, business number) for each of these “reportable entities.”
Example:
The ABC family trust only holds assets consisting of money with a fair market value less than $20,000 throughout the taxation year ending December 31, 2023, earning $700 in interest income, which is retained in the trust. In this situation, the trust is considered to be a listed trust.
Although the trust is a listed trust, and therefore does not need to include Schedule 15, it would still be required to file a T3 return because it earned more than $500 in income during the taxation year as outlined in FAQ 2.1.
What is a bare trust?
Defined in FAQ 3.1, a bare trust is a trust arrangement under which the trustee can reasonably be considered to act as agent for the beneficiaries with respect to the trust’s property, evidenced by the trustee having no significant powers or responsibilities, or ability to take action without instructions from the beneficiaries, and where the trustee’s only function is to hold legal title to the property.
Two common examples of situations in which a bare trust arrangement can exist include transferring property into joint ownership with an adult child and the use of in-trust-for (ITF) accounts.
Joint ownership
When a parent adds their adult child as a joint owner of their house, bank account or non-registered investment account, their intention might only be to simplify their future estate administration or minimize probate fees, not to immediately alter the beneficial ownership of the property. The legal presumption in these cases may be that such assets are held in trust. This presumption may be rebutted if there is evidence to support that the transfer of ownership to joint tenancy reflects an immediate gift to the adult child rather than a trust arrangement. This may result in other tax, legal and estate consequences.4
In-trust-for (ITF) accounts
In-trust-for accounts can be agency arrangements, true trusts or neither, in that the assets remain the property of the transferor. Whether or not a true trust relationship exists depends on all the circumstances and, absent a formal trust deed or other documentation, requires a tax or legal opinion.
Reporting
A bare trust would report income of "NIL" on its T3 return, and the beneficial owners of the property are required to report any income earned or taxable capital gain realized on that property on their own tax return. A bare trust is now also required to complete Schedule 15 annually, unless it is a listed trust.
When is the filing and disclosure deadline?
The filing and disclosure deadline for trusts is generally 90 days after their year-end. Since March 30, 2024, falls on the Saturday of a long weekend, the filing deadline is extended to April 2, 2024.
What are the consequences of non-compliance?
Non-compliance penalties accrue at $25 per day with a minimum penalty of $100 and a maximum of $2,500. If failure to file was done knowingly or due to gross negligence, the penalty is equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the market value of all the property held by the trust.
Administrative Relief for Bare Trusts
Limited to bare trusts and only for the 2023 tax year, the CRA will waive the late-filing penalty for T3 returns and Schedule 15s filed after the filing deadline. This temporary relief does not apply to missing information nor to a failure to file that was made knowingly or due to gross negligence.
Next Steps
If you are a trustee, please contact your Odlum Brown Investment Advisor or Portfolio Manager for assistance in gathering relevant year-end information based on your trust’s year-end (such as asset values and trust income). Please consult your legal and tax advisor before the filing deadline to assess how these changes may impact you.
4 Whether a bare trust arrangement exists is a legal determination and depends on case facts. Joint ownership with adult children has been the subject of significant estate litigation. For more information, ask for our article “Joint Ownership in Estate Planning.”
The information contained herein is for general information purposes only and is not intended to provide financial, legal, accounting or tax advice and should not be relied upon in that regard. Many factors unknown to Odlum Brown Financial Services Limited may affect the applicability of any matter discussed herein to your particular circumstances. Odlum Brown Financial Services Limited is a wholly owned subsidiary of Odlum Brown Limited, offering life insurance products, retirement, estate and financial planning exclusively to Odlum Brown clients.