In an effort to counter tax avoidance and assess tax liability for trusts, tax return filing and reporting requirements that were initially introduced in Budget 2018 commenced to apply for trusts with tax year ends after December 30, 2023. Proposed amendments in August 2024 will significantly reduce the return filling and enhanced reporting burden.
Previously, trusts only had to submit a T3 trust income tax and information return (T3 return) under specific circumstances, such as when the trust owed taxes, sold a capital property, or had a taxable capital gain. Additionally, a trust might also need to file a T3 return if it received income, gain, or profit from the trust property that is assigned to one or more beneficiaries. In these cases, the trust should file a T3 return if its total income from all sources is over $500, if it has more than $100 of income allocated to a single beneficiary, or if it made a distribution of capital to one or more beneficiaries.
The current rules expand the scope of trusts that need to file an annual T3 trust return and impose additional disclosure requirements on details of the trustees and beneficiaries. The impacted trusts are express trusts, bare trusts, and, for civil law purposes, a trust that is other than a trust established by law or by judgement. An express trust is a form of trust that is established with a clear and deliberate intention on the part of the settlor, usually through a trust agreement or a testamentary document.
All trusts are required to file an annual T3 trust return, with limited exceptions. This means many trusts that previously did not have to file are required to file an annual T3 return, including a “bare trust” (further discussed below). In addition, unless the trust is considered a “listed trust” (defined below), every trust that is required to file a T3 return is now required (under section 204.2 of the Income Tax Regulations) to provide additional beneficial ownership information by completing Schedule 15, Beneficial ownership information of a trust, which is a part of the T3 return package. Schedule 15 requires the applicable trusts to report the identity of the settlor(s), trustee(s), beneficiary(ies), and anyone who can influence the trustee's decision-making with regard to income or capital allocation. Information such as names, addresses, dates of birth, jurisdiction of residence, and taxpayer identification numbers (TINs) must also be provided for each of these parties. The T3 return, along with Schedule 15 (if applicable), must be filed within 90 days after the end of the trust's tax year.
A penalty will apply if a trust must file a T3 return (including the Schedule 15 beneficial ownership schedule) but fails to do so. Where a trust that has failed to file has unpaid taxes on the filing deadline date, the late-filing penalty is calculated based on the unpaid taxes of the trust on the filing deadline date. Where a trust that has failed to file has no unpaid taxes on the filing deadline, the penalty will be equal to $25 for each day of delinquency (with a minimum penalty of $100), up to a maximum penalty of $2,500. Furthermore, if a failure to file the return was made either knowingly or due to gross negligence, an additional penalty will apply. The additional penalty will be equal to 5% of the maximum fair market value (FMV) of the property of the trust, with a minimum penalty of $2,500.
Certain types of trusts, known as “listed trusts”, are excluded from these additional reporting requirements, including the following:
Note: Please see the proposed amendments section for changes to this requirement.
For clarity, most commercially available mutual fund trusts, corporations and exchange-traded funds (ETFs) will be exempt from the enhanced trust beneficiary filing requirements.
To illustrate the application of the current enhanced reporting rules, assume that XYZ family trust holds assets consisting of units of a mutual fund trust with an FMV less than $30,000 throughout the taxation year ending December 31, 2023, and earned $1,000 in interest income during the year which was retained in the trust. In this example, XYZ family trust is considered a listed trust and, therefore, does not need to include Schedule 15 under the new reporting requirements. However, the trust would still be required to file a T3 return because it received more than $500 in income during the taxation year. Assuming the value of the mutual fund trust was indeed worth over $50,000 at any point in the year, then XYZ family trust would need to file the enhanced beneficiary reporting information via Schedule 15 with its T3 trust return.
For trust taxation years ending after December 30, 2024, the proposed enhanced rules introduced in August 2024 may further exempt certain trusts from the enhanced trust beneficiary reporting requirements. These exemptions may apply to specific types of trusts, including:
For proposed amendments to bare trust reporting requirements, please see the section “Application to Bare trusts” below.
As of the date of writing this article, the proposals have not been enacted into law though we are keeping track of this proposal as it develops.
In general, ITF accounts are “informal trusts” that are set up to invest funds on behalf of a minor. Under contract law, minors do not have the legal capacity to enter into a binding contract to purchase financial instruments in their own name. ITF accounts can grant minor beneficiaries access to otherwise inaccessible investment opportunities. When a donor settles property into a trust, the individual “divests, deprives, and dispossesses” of the property. This generally indicates that the beneficial ownership of the property has changed since the beneficiary has effectively become the new owner. Unlike formal trusts, informal trusts are generally not supported by legal documentation, such as a trust deed documenting the parameters of the trust.
If an in-trust-for (ITF) account is considered a valid trust, it is our understanding that it would fall within the scope of the new trust reporting rules. A T3 return, along with Schedule 15, should be filed for the trust unless the trust falls under one of the exceptions above. If the ITF account is classified as otherwise, it likely would not be subject to the new trust reporting requirements.
For a trust to be considered valid, three certainties must exist, which may or may not be formally documented. The first is the certainty of intention, which refers to the certainty of the donor’s absolute intention to settle the property into the trust. The second certainty – certainty of subject matter – requires that the property itself being donated is known with absolute certainty. The third certainty – certainty of objects – refers to the beneficial owner (i.e., beneficiary) of the property; they must be defined clearly. A valid trust exists when all three of these certainties are clear and present. It is a question of fact whether all three certainties exist and whether a valid trust exists. The determination is made on a case-by-case basis. In addition, the trust must not violate any legal or public policies in order to be considered valid (e.g., it must not be created to defeat creditors in the event of, or on the eve of, bankruptcy).
If the evidence does not indicate the existence of a valid trust, the Canada Revenue Agency (CRA) may consider the ITF account an agency arrangement, a gift, or an arrangement of some other nature. As ITF accounts come with inherent uncertainties, their tax implications, which follow the nature of the arrangement, also contain uncertainties.
Due to the complex nature of trust arrangements, it is recommended that legal counsel be sought when approaching the topic of trusts to help ensure the settlor’s intentions for the trust are properly documented, executed, and satisfied. An accountant may also be consulted to determine the suitability of using informal and/or formal trusts to achieve an individual’s financial objectives.
In addition, as ITF accounts come with inherent uncertainties, it is important to seek the guidance of a qualified accountant where necessary to determine the impact of the trust reporting requirements on client(s) who hold ITF accounts.
A bare trust (sometimes referred to as a “naked trust”), although not defined in the Income Tax Act (Canada), generally refers to a trust where the trustee has legal ownership of the property but has no other duties, obligations, and responsibilities with respect to the property as trustee. The trustee’s only function is to hold legal title to the property. In essence, a bare trust is a principal-agent relationship, which means that the trustee can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all trust’s properties.
Bare trusts are specifically included in the enhanced trust reporting rules. However, no reporting (i.e., filing of a T3 return, including Schedule 15) is needed for the 2023 and 2024 tax years unless expressly requested by the CRA. The exemptions were granted in communications from the CRA, dated March 28, 2024 and October 29, 2024 respectively, though they are only available to bare trusts, and only for the 2023 and 2024 tax years.
The difficulty with bare trusts is that they do not need specific documents or paperwork to be formally established. In some situations, bare trusts can be created inadvertently. This lack of formality can make many Canadians, especially those without access to advanced tax advice, unaware of the need to file a Schedule 15 and T3 return. We also note that confusion may arise in situations due to the broad definition of a bare trust and the limited official guidance currently available. We are hoping that more guidance will be released by the Canada Revenue Agency (CRA) in the future. Given the nuanced nature of bare trusts and the potential for individuals to overlook their reporting obligations, seeking tax advice may be an important step for Canadians to take when dealing with the new trust reporting rules.
Commencing 2025, the proposed amendments to the current rules would ensure a bare trust is exempt from filing a T3 return where throughout the year:
We are actively monitoring the proposed enhancements to the trust reporting rules introduced in August 2024. Should these enhancements be implemented, we will update this article accordingly.
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