New trust reporting requirements are coming

November 10, 2022

Trusts are a powerful tool used in tax and financial planning. The main advantage of a trust is that it allows you to separate the control and management of assets in the trust from its ownership. Trusts have many uses in both family and estate planning and as a tool to administer an estate on the death of an individual.

In order to increase the transparency of how trusts are used—and on the persons who have created, control, and benefit from trusts—the federal government announced new trust reporting rules in its 2018 budget to improve the collection of this information. The new reporting requirements are a considerable change from the current rules and carry significant penalties for non-compliance. Trustees of affected trusts need to understand the new reporting obligations, assess whether the required information is readily available, and plan to obtain the necessary details to ensure compliance.

Draft legislation to enact this change was first released in 2018 with a first effective date for Dec. 31, 2021 year-ends. Recently, the government delayed the effective date of this legislation a second time, and it will now only apply to trust year-ends ending on or after Dec. 31, 2023.

The current rules

In the current environment, a trust generally has to file a T3 annual return if it has taxes payable or makes a distribution to one or more beneficiaries. Personal information on trustees, beneficiaries, settlors, or other persons are not currently required to be reported to the Canada Revenue Agency (CRA). There is no current reporting requirement for Canadian trusts that have no income, or for bare trusts—an arrangement where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all of the trust's property.

The new rules

For trust taxation years ending on or after Dec. 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.

New filing requirement

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.

Enhanced reporting obligation

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.

Exceptions

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

Penalties

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.

CRA modernizing T3 trust return processes

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

Takeaways

The new reporting obligations can be onerous for certain trusts. As the new rules will apply for trust taxation years ending on or after Dec. 31, 2023, trustees should invest the time to understand the new requirements and plan ahead so compliance obligations can be met. This may include reviewing trust documents in detail to ensure all relevant parties are identified. It is advisable to engage in early communications with the affected parties, such as beneficiaries and settlors, so that obligations are clear and the required information can be gathered in a timely manner. Being proactive is advisable especially in situations where beneficiaries may be unknown or potentially uncooperative.

Where it makes sense, trust administrators should also consider unwinding trusts that are no longer needed to minimize ongoing compliance obligations. Any trusts wound up in 2022 will not be subject to the new reporting obligations. However, affected trusts wound up in 2023 will not be exempt from filings, unless they are a graduated rate estate, as the year-end of inter-vivos trusts and testamentary trusts that are not graduated rate estates is Dec. 31, even if the trust has distributed all its assets by Dec. 31.

How BDO can help

While trusts are useful for tax and financial planning, it's very important to be aware of the current and new rules. It can be difficult to stay on top of the changes, but BDO can help you navigate the process.

If you have any questions, contact your local BDO advisor today.


The information in this publication is current as of November 10, 2022.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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