New trust reporting requirements are coming

For trust taxation years ending on or after December 31, 2023, all non-resident trusts that currently have to file a T3 return and express trusts that are resident in Canada, with certain exceptions, will be required to file a T3 return and to report additional information as part of that return each year. The draft legislation also specifically includes bare trusts within the scope of these new rules.

With limited exceptions, the new rules generally require the filing of a T3 return by express trusts that are resident in Canada even if it does not have any income to report. An express trust is generally a trust created with the settlor's express intent, such as through a trust deed or a will, as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute. This new filing requirement will include trusts such as those created to hold private company shares as part of an estate freeze, and trusts created to hold vacation or other personal property.

Each year, affected trusts must report additional information on all trustees, beneficiaries, settlors, and each person who has the ability to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g., a protector), including:

• Name
• Address
• Date of birth
• Jurisdiction of residence
• Taxpayer identification number, such as social insurance number, trust account number, business number or taxpayer identification number used in a foreign jurisdiction

For purposes of this reporting, a settlor refers to a person who has made a loan or transfer of property, to or for the benefit of the trust at anytime. A loan or transfer made for the benefit of the trust would include, for example, the transfer of property to establish the trust (the traditional meaning of settlor), a low-interest loan, or a transfer at less than fair market value to an entity in which the trust has an interest. (Commercial loans and transfers for value by an arm's length persons would not create a settlor relationship.)

This enhanced reporting obligation aims to help the government more effectively counter aggressive tax avoidance, tax evasion, money laundering, and other criminal activities perpetrated through the misuse of trusts. With this in mind, trustees should know that reporting this new information may prove onerous for certain trusts and should plan ahead to be in compliance.

This information should be reported on a new schedule to be filed with the trust's T3 return. Note that affected trusts must file the T3, including the new schedule, and cannot simply file the new schedule on its own even if the trust has no income for the year. In the case of family trusts, this means that they will need to be transparent with respect to all possible beneficiaries—even contingent beneficiaries—of the trust as well as making annual trust filings in years where there is no distribution of income or capital.

There are exceptions to the new reporting requirements, including:

• Trusts that have been in existence for less than three months
• Trusts that hold assets not exceeding $50,000 in total fair market value throughout the year (but only where the only assets are cash, certain government debt obligations, a share, debt or right listed on a designated stock exchange, a share of a mutual fund corporation, a unit of a mutual fund trust, and an interest in a related segregated fund)
• Certain regulated trusts, such as a lawyer's general trust account
• Trusts that qualify as non-profit organizations or registered charities
• Mutual fund trusts, segregated funds, and master trusts
• Graduated rate estates
• Qualified disability trusts
• Employee life and health trusts
• Certain government funded trusts
• Trusts under or governed by certain registered plans
• Cemetery care trusts and trusts governed by eligible funeral arrangements

New penalties are being introduced along with the new reporting requirements. With respect to the new reporting obligations, if any person or partnership knowingly or under circumstances amounting to gross negligence makes—or participates in, assents to or acquiesces in, the making of—a false statement or omission in the return of a trust, fails to file a return for a trust, or fails to comply with a demand to file a return, the penalty is the greater of:

• $2,500
• 5% of the highest total fair market value of all the property held by the trust in the year

For affected trusts that hold high value assets, such as a vacation home or shares of a private corporation, the cost of non-compliance can be significant.

In addition, existing penalties in respect of T3 returns continue to apply. The penalty for the failure to file a T3 return is $25 per day with a minimum of $100 and can increase up to $2,500.

In anticipation of the increase in volume of T3 returns that will be filed because of the new rules, the CRA is modernizing its systems and processes used for T3 returns. Planned changes will be rolled out over the next few years, beginning with online application for trust account numbers and subsequent registration of trust account numbers in CRA's My Account or My Business Account. T3 electronic filing for most inter-vivos and family trusts was available for 2021 T3s. Mandatory e-filing of T3 returns is proposed to start as of Jan. 1, 2024, meaning that the majority of 2023 trusts will need to be e-filed if the proposed legislation is passed.

When the CRA has the capability to receive and process T3 returns electronically, it will be better equipped to analyze and assess T3 information, including the new beneficial ownership details required to be reported. Taxpayers should get used to the increased transparency with respect to trusts, which will likely come with heightened scrutiny from the CRA.