New rules aimed at providing more transparency on beneficial ownership of assets now require that most trusts, including estates, file a T3 Trust Tax return on an annual basis. The nature of these changes is such that it might catch many individuals and businesses off guard as they may not be aware of their trust-like relationships, exposing them to potential penalties and other consequences for non-compliance.
The rules became effective for 2023, with a filing deadline of April 2, 2024.
Expanded Reporting for Formal Trust Arrangements
Trustees who are appointed under formal trust arrangements are generally aware of their responsibilities to file periodic trust returns. Under the old regulations, a trust only needed to file a trust tax return in taxations years where the trust earned income or disposed of property. The new regulations now require a trust to file a trust tax return on an annual basis, regardless of whether there was property disposition or income earned.
New Implications for Bare Trust Arrangements
The rules have been expanded to include cases where a trustee acts as an agent for beneficiaries, commonly known as a bare trust. In such instances, the person/entity listed as the owner of an asset is not the true beneficial owner; instead, they hold the asset on behalf of another party.
Does a bare trust arrangement exist?
To determine if a bare trust arrangement exists, the following question should be asked:
- Is the person on title or holding the asset the true beneficial owner?
Circumstances can give rise to a bare trust when there is a mismatch between legal ownership (who is on title) and beneficial ownership (who will benefit from the proceeds). For example, who receives the benefits of the asset (such as interest income or the sale proceeds) and who bears the costs or risks of the asset (such as property taxes)?
There are several reasons why an individual, business or organization may use a bare trust arrangement. In many cases, lawyers are not involved, and no formal written agreement has been drafted. As such, the parties involved in a bare trust arrangement may not realize that they are a part of a bare trust, much less that they may have a filing requirement with CRA. While there are countless possibilities of bare trust arrangements, the following are common scenarios:
Individual Reasons
- a parent is on title of a child’s home to assist with financing requirements but has no beneficial ownership in the property.
- a parent or grandparent holds an investment or bank account in trust for a child or grandchild.
- a self-employed individual opts to have their spouse as the sole owner on title of a house or asset although the other spouse is at least a partial beneficial owner.
Estate Planning Reasons
- an adult child is on title of a parent’s home for probate or estate planning purposes only, and there is an understanding that the proceeds are to be divided amongst the “beneficiaries” on death.
- an adult child is a joint owner with their parent(s) bank accounts or investment accounts to assist with the distribution of assets after their passing to multiple beneficiaries.
Business Administration Reasons
- a bank account is opened in the personal names of the shareholders with the corporation being the beneficial owner of the funds.
- a partner of a partnership is holding a bank account or asset for the benefit of all the other partners of a partnership.
It is important to note that most instances of joint ownership, such as spouses jointly owning a bank account, do not give rise to a bare trust scenario.
Does a T3 Trust Tax Return need to be filed?
After determining that a bare trust arrangement exists, it is important to determine whether an exception from filing a trust return is available.
Some of the more common exceptions include:
- trusts in existence for less than three months at the end of the year
- trusts holding only cash (bank accounts) and publicly listed shares with a total fair market value that does not exceed $50,000 at any time in the year.
- registered charities and non-profit clubs, societies, or associations.
A trust return must be filed if one of the exceptions are not met. Even where one of the new exceptions is met, a trust would still need to file a return if they had to file under the prior rules, such as the trust having taxes payable or having disposed of capital property.
Please click on the following link to access a sample T3 Trust Income Tax return:
T3 - Trust Income Tax and Information Return
What information must be disclosed?
Where a trust is required to file a tax return, the identity of all the trustees (who is on title or holds the asset), the beneficiaries (who really owns the asset), the settlors (who owned the asset originally) and anyone with the ability to exert influence over trustee decisions regarding the income or capital of the trust must be disclosed.
The following information must be disclosed on Schedule 15, Beneficial ownership information of a trust
- name, address, and date of birth (if applicable)
- country of residence
- tax identification number (e.g. social insurance number, business number, trust number)
Please click on the following link to access a sample of the Disclosure Form:
Beneficial Ownership Information of a Trust Form
Penalties for late filing or non-disclosure
Failure to make the required filings and disclosures on time attracts penalties of $25/day, to a maximum of $2,500, as well as further penalties on any unpaid taxes.
New gross negligence penalties may also apply, being the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year.
These will apply to any person or partnership subject to the new regime.
CRA has recently indicated that, for bare trusts only, the late filing penalty would be waived for the 2023 tax year in situations where the filing is made after the due date of April 2, 2024. However, CRA noted that this does not extend to the penalty applicable where the failure to file is made knowingly or due to gross negligence.
Since there is limited guidance on who would qualify, it is recommended that disclosures should be made in a timely manner. In addition to penalties, failing to properly file trust returns may result in negative tax (such as possibly losing access to the principal residence exemption) and non-tax (such as inadvertently exposing assets to creditors inappropriately) consequences.
You can find additional details regarding the new trust reporting rules on the Canada Revenue Agency website, or by clicking on the following link:
CRA Guidance for New Trust Reporting Requirements
DISCLAIMER
This article is being published for general information purposes only. This article does not constitute legal advice. If you require legal advice pertaining to your specific situation, please contact a tax lawyer. Please note that this post is only as current as its publishing date (March 7, 2024), but the relevant rules, guidance, and legal interpretation change constantly.
