Creating a trust is a common estate planning practice most Canadians use to hold assets tax-efficiently. Many trusts don’t even need to file taxes. However, this has changed under the new Canada Revenue Agency (CRA) rules.
Most trusts not required to file taxes earlier will also have to file tax returns for the 2023 financial year by April 2, 2024. Failing to file returns on time could attract a penalty of $2,500 or 5% of the maximum property value held by the trust during the tax year, whichever is greater. If you hold a real estate property worth $500,000 in a trust, it is better to act fast to avoid a hefty penalty of $25,000 (5%).
Does Your Trust Fall Under the New Trust Reporting Guidelines?
Earlier, a trust resident in Canada had to file T3 returns when there was a tax liability or the trust sold a capital property. However, the new rules require the trust to file returns even when there is no tax liability, distributions or property sale. The CRA’s objective is to give the federal government transparency arountrusts are being used, who owns and controls them, and who benefits from them.
The new rules include express trusts and bare trusts. An express trust holds property or asset, is created with intent (in writing), and has beneficiary/es. A bare trust is an arrangement (may or may not be in writing) where the trustee only holds the legal title to the asset on behalf of the beneficiary. The trustee has no discretion over the asset and only follows the beneficiaries’ instructions like an agent.
An example of a bare trust is a nominee holding the legal title of a cottage on behalf of the beneficiary owner. If there is a principal-agent relationship but no property involved, it doesn’t constitute a bare trust. Bare trusts are generally exempt from tax as any income, gain, or profit from the property does not belong to the trust. Under the new rules, the tax treatment of bare trusts remains unchanged, but tax filing is mandatory.
This year could be a learning curve for many bare trusts as they will file tax returns for the first time. Hence, the government has indicated that they might not impose late filing penalties for the first round of filings. However, it is better to avoid unnecessary delays to prevent the penalty of 5% of asset value for late filing or not filing returns when there is no tax liability.
What Are the New Trust Reporting Guidelines?
Even if your trust has no tax liability, you must file a T3 tax return and Schedule 15 disclosure, which requires a trust to submit information on all parties that were a part of the trust during the financial year. They include the trustee, beneficiary, settlor, and controlling person who can influence the trustee’s decisions on the income or capital of the trust.
Note that the definition of a ‘settlor’ in the new disclosure goes beyond the person who established the trust. It includes all persons who participated in an estate freeze in favour of the trust, sold the property, lent money or property to the trust, or paid expenses on behalf of the trust. As a trust, you might want to trace back your 2023 transactions to identify settlors. Remember, the omission of even a single name could trigger the above 5% penalty.
Under Schedule 15, you have to submit the following information about reportable entities:
- name, address, date of birth
- jurisdiction of residence
- taxpayer identification number (TIN) such as social insurance number, business number, trust account number or foreign TIN.
If you are filing T3 for the first time, you might have to also apply for a trust account number. If the bare trust or trustee is a corporation, they must file a T3 trust return and a T2 corporate income tax return. If your trust has been filing returns and there are no changes in Schedule 15, you need not provide the details. The CRA will carry forward the returns from the previous year.
Trusts Exempted from New Reporting Guidelines
The new trust reporting guidelines include most trusts, but if your trust meets the below definition, you need not file returns:
- A trust established less than three months before December 31, 2023, and
- A trust was holding less than $50,000 worth of assets (cash, listed securities, and debt obligations) at any time during the financial year.
Some trusts are excluded from the new tax filing guidelines:
- Trusts that qualify as not-for-profit organizations (NPOs) or registered charities
- Registered savings accounts like (FHSA, TFSA, and RRSP)
- Mutual fund trusts, segregated fund trusts, and master trusts
- Qualified disability trusts
- Employee life and health trusts
- Certain government-funded trusts
- Graduated rate estates
- Trusts with all units listed on a designated stock exchange
- Employee profit-sharing plans
- Registered supplementary unemployment benefit plans
- Cemetery care trusts or a trust governed by an eligible funeral arrangement
- Regulated trusts, such as lawyers’ general trust accounts
Determining which trust is excluded is a little more complicated than the above list, as every trust structure differs. For instance, NPOs are excluded from the additional trust reporting, but internal trust within the NPO has to file T3 returns. In another example, lawyers’ general trusts are excluded. But if they are maintaining a trust for a specific client, they have to file T3 returns for that trust.
The structure of a trust is complicated. A skilled tax consultant can untangle the complex web of trust reporting eligibility and reportable entities.
Contact Glenn Graydon Wright LLP in Oakville to Help You with New Trust Reporting Guidelines
Time is of the essence here. Trustees should start collecting all the required information and work with a professional tax consultant to file the taxes and Schedule 15 disclosure on time under the new guidelines. And if you do qualify for exemptions, the consultant can help you justify it. To learn how Glenn Graydon Wright LLP can provide you with your tax filing and trust reporting services, contact us online or by telephone at 905-845-6633.