There are instances where a person may not be aware that a trust relationship exists, and which may not be visible to your advisor. It is therefore critical to consider some of the common traps that would give rise to a reporting obligation which if not complied with would result in penalties. This is elaborated below.
New trust reporting rules
The new trust reporting rules require most trusts to file a T3 Trust Income Tax and Information Return annually for tax years ending on or after December 31, 2023, even if the trust earned nil income in the year. Because the March 30, 2024 deadline for 2023 trust returns is a Saturday, the filing deadline is extended to April 2, 2024.
It is critical to note that these rules apply to what is commonly referred to as a “bare trust” or informal trust, which is an arrangement where it can reasonably be considered that a taxpayer acts as agent for its beneficiary(ies) with respect to property. Whether a written trust deed or indenture is in place is irrelevant in determining if a trust filing is required.
Given the above, taxpayers may not even realize that they could be caught by the new rules. Examples of situations where the new trust reporting requirements would apply where previous trust returns were not required include but are not limited to the following:
- Bare trust arrangements
- Where a taxpayer is holding property (e.g., real estate) in trust for another taxpayer
- Where a taxpayer is on title of a property for probate/estate planning purposes
- Where a taxpayer is on title of a property simply for mortgage purposes
- Where a bank account is opened by a parent for the benefit of a minor child
- Trusts with nil income (e.g., a trust that holds a family cottage)
All trusts, including trusts that previously filed returns, will face more extensive disclosure requirements as follows. Trust tax returns must now report detailed information regarding all “reportable entities,” which include the trust’s trustees, beneficiaries, and settlors (if applicable), as well as any person who has the ability through the trust terms or other document to exert control or override trustee decisions on the appointment of the trust’s income or capital. Reportable entities can be individuals, corporations, trusts, or other entities. The process of gathering the required information for the first time can be burdensome and, generally, the information includes the entity name, mailing address, date of birth if applicable, jurisdiction of tax residency, and tax identification number (e.g., SIN, corporate business number).
Under the arrangements noted above, as well as all other bare trust arrangements and express/formal trusts, a trust return is required to be filed unless a specific exemption is met. Two of the most common exemptions which should be considered are:
- If the trust arrangement existed for less than 3 months as of December 31, 2023, a trust return will not have to be filed for the 2023 taxation year, provided that the trust in question would otherwise not have to be filed under the old trust reporting rules.
- If the maximum value of trust assets is less than $50,000 CDN throughout the year AND where the trust assets are only comprised of cash and certain exempt marketable securities (the most common of which are shares, debt, or rights listed on a Canadian stock exchange or designated foreign exchange, shares or units of a mutual fund trust or corporation, and debt obligations guaranteed by the Canadian government such as a treasury bill, but including deposits insured by the Canada Deposit Insurance Corporation), provided that the trust in question would otherwise not have to be filed under the old trust reporting rules.
Note that a GIC is not an exempt marketable security for the above purpose.
For example, if an individual held a bank account for a minor which did not exceed $50,000 CDN throughout the year, a trust return would not have to be filed for this arrangement.
If a trust return is not filed in a timely manner, the basic penalty is $25 for each day late, with a minimum penalty of $100 and a maximum of $2,500. In addition, if the trust owed tax, an additional penalty of 5% of the unpaid tax when the return was due would apply plus 1% of such unpaid tax for each full month that the T3 return is late. If there are repeated failures to file, the penalties would be higher.
The new rules impose significant additional gross negligence penalties where a failure to file the return, or a false statement or omission in the return, was made knowingly or due to gross negligence. The additional penalty would be five per cent of the maximum value of property held by the trust during the relevant year, with a minimum penalty of $2,500.
TZR Recommendation
Contact your TZR advisor as soon as possible if you believe that you may be impacted by the new trust reporting requirements. We reiterate that you may be party to trust arrangements not visible to your advisor.
The above content is for informational purposes only and is general in nature. It is not intended to be advice. No person or entity should act upon the information above without receiving professional advice after all the facts and circumstances specific to their situation are thoroughly reviewed.