Trust tax reporting requirements

New trust disclosure rules originally announced on February 27, 2018, are now in force, and trusts with taxation years ending on or after December 31, 2023 are now subject to a series of new requirements relating to reporting and disclosure. Trusts with a 2023 calendar year-end must file a tax return for the 2023 taxation year by March 30, 2024, and must include in their filing the newly-implemented disclosure requirements. Note, all trusts (other than graduated rate estates) generally have a December 31 tax year-end.

Specifically, trustees must now significantly increase the amount of information disclosed to Canada Revenue Agency (“CRA”), and must file a T3 Trust Income Tax and Information Return (“T3 Return”) for each year in existence going forward, whether or not income is earned within the trust. With the 2023 taxation year having ended, this article highlights the changes to be considered when filing for 2023. We encourage trustees to contact their lawyer, accountant or tax preparer to discuss the impact on any existing trust arrangements that might be in place.

The new rules apply to all “express trusts”. The CRA indicates they consider an express trust to be “a trust generally created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provision of a statute)”.

New information disclosure requirements

For express trusts in existence during the 2023 taxation year, information must be collected and reported on the following persons:

• trustee(s) of the trust;
• beneficiary(ies) (including contingent beneficiaries, corporations or trusts which are current or potential beneficiaries, and any beneficiaries that cannot be listed by name, such as unborn children and grandchildren);
• the settlor of, or any other contributor to, the trust; and
• any person able to exert control or influence over a trustee’s decisions (i.e. a protector, and potentially an advisory board or the author of a letter of wishes).

That information for each person includes:

• legal name;
• address;
• date of birth (for individuals);
• country of residence; and
• tax identification number (Canadian or foreign).

Trustees will need to work with their tax preparers to collect, store, and manage this information in order to facilitate tax filing in 2024 and subsequent years. This information will have to be filed as a schedule to the T3 Return filed in 2024 for the 2023 taxation year (Schedule 15), and not separately.

The disclosure required for the beneficiaries of trusts is quite broad. The CRA has indicated this broad test:

“Generally, the determination of who is a beneficiary of a particular trust requires a finding of fact based on all the relevant information, including the terms of the trust and the settlor’s intent in establishing the trust. In essence, a beneficiary of a trust is a person (other than a protector) who has a right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person’s right to any of the income or capital is immediate, future, contingent, absolute or conditional on the exercise of discretion by any person. However, such a determination is ultimately dependent on the specific facts, terms of the trust as well as the relevant trust law.” [Emphasis added]

We note that disclosing that level of required information can have significant impact on many Canadians’ estate plans, as the information noted above must be collected from all beneficiaries, as well as those individuals involved in the settlement, management, and administration of the trust. This may come as a surprise to persons involved with discretionary family trusts settled several years ago without much activity since settlement. The rules also apply to testamentary trusts, estates that are not graduated rate estates, and other types of inter vivos trusts.

While there is an exemption for trusts that have been in existence for less than three months, the new rules catch many unexpected situations:

1. Any trust that was in existence on January 1, 2023 will need to file for the 2023 tax year, in accordance with these new requirements. This means that if a trust existed for three months in 2022 and was still in existence on January 1, 2023, even if it was wound up on January 2, 2023 a T3 Return would still need to be filed for the 2023 taxation year.
2. In addition, any trust that was in existence for more than three months within 2023, even if wound up during 2023, is subject to the T3 Return requirement.

It is thus crucial that trustees of a trust that was in existence at any point in 2023 consider the new rules, and determine whether action is required to mitigate the impact of these changes.

New filing requirements

Trustees of trusts created during an estate freeze, bare trusts, or trusts designed to hold specific property, may have never filed T3 Returns if the trust has not earned any income since its settlement. Going forward, all these “express trusts” resident in Canada and certain non-resident trusts are required to file a T3 Return, regardless of whether income is earned.

Of particular importance, the CRA has indicated that these new rules extend to bare trusts, despite the fact that bare trusts are not considered as taxable trusts from a tax law perspective. The implication of this is that the trustees of bare trusts must file a T3 Return for 2023 and every subsequent year the trust exists, even though bare trusts are still not separate taxpayers for income tax purposes and any income earned is taxed in the hands of the beneficial owner, not the trust.

While “bare trusts” are not explicitly defined in the Income Tax Act, the CRA’s T3 Trust Guide defines bare trusts as an arrangement where “the trust 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”. The Trust Guide further provides that 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.” In a bare trust situation, the trustee generally must consult and take instructions the beneficiary with respect to dealings with the trust property.

As a result, these new rules may extend to the following types of relationships, in addition to the more traditional express trust relationships such as alter ego, joint partner, spousal, testamentary, family, and business trusts:

• Foreign trusts 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.
  • Individuals who are added as a co-owner of a bank or investment account or on title to real property for administrative ease during an owner’s lifetime or for estate administration;
  • Individuals who hold an “in trust” bank or investment account for a child or a parent;
  • Individuals who purchase property “in trust” but the actual owner is not clearly identified;
  • Individuals who are 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 or financing purposes);
  • Corporations that hold title to real property on behalf of a beneficial owner (such as holding the title to investments or real property in a nominee corporation);
  • Drop-down transactions for capital gains planning whereby the parent company becomes a bare trust nominee for the subsidiary where no legal transfer of ownership of the “dropped” assets has been effected;
  • General partners (typically corporations) in a limited partnership arrangement that are the title holders to the underlying assets of the partnership; and
  • Real property managers who have a bank account into which they deposit revenues and from which they pay expenses on behalf of the beneficial owner.

  Consequences of failing to meet requirements

  If the trustees of a trust that is required to file a T3 Return for 2023 (or any year thereafter) fail to do so, or fail to provide the additional information needed by these new requirements, they will be subject to a penalty. The penalty will be equal to $25 per day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.

  If the failure was made knowingly, or due to gross negligence, a penalty of 5% of the maximum value of the property held during the relevant tax year by the trust will be applied. This additional penalty will be a minimum of $2,500, and will be in addition to existing penalties with respect to T3 Returns. This could be very significant if the trust holds valuable assets.

  As an example, if a cottage property or common shares of a private company are held in a trust and are worth $500,000, the penalty for knowingly failing to remit a T3 Return, or submit all of the information required for all involved individuals, would be $25,000 (over and above any other penalties which may also apply to that trust).

  Exclusions from new requirements

  The following types of trusts will not be subject to the updated requirements:

  • mutual fund trusts, segregated fund trusts and master trusts;
  • trusts governed by registered plans (i.e., deferred profit-sharing plans; pooled registered pension plans; registered disability savings plans; registered education savings plans; registered pension plans; registered retirement income funds; registered retirement savings plans; employee profit sharing plans; first home savings accounts; registered supplementary unemployment benefit plans; and tax-free savings accounts);
  • lawyers’ general trust accounts (but not client-specific trust accounts as noted above);
  • graduated rate estates and qualified disability trusts;
  • employee life and health trusts;
  • certain government funded trusts;
  • trusts where all of their units are listed on a designated stock exchange;
  • trusts that qualify as non-profit organizations or registered charities;
  • trusts that are required under the relevant rules of professional conduct or the laws of Canada or a province to hold for the purposes of the activity that is regulated under those rules or laws, provided it is not maintained as a separate trust for a particular client or clients;
  • cemetery care trusts, or trusts governed by an eligible funeral arrangement;
  • trusts that have been in existence for less than three months; and
  • trusts that hold less than $50,000 throughout the taxation year, if the holdings are limited to money, bank deposits, government debt obligations, shares of capital stock of a mutual fund corporation, units of a mutual fund trust, or listed securities (described in more detail in the Income Tax Act).

  We note that this article is meant to serve as an update and a starting point to understanding the new trust disclosure requirements. For a complete guide on filing a compliant tax return under the new requirements, see the CRA’s T3 Trust Guide.

  This Thought Leadership piece is provided for general information only and does not constitute legal advice. For more information please contact the authors, or a member of our Tax or Estates & Trusts Groups.

  Click here to subscribe to Stewart McKelvey Thought Leadership.