As the year wraps up, it's time to get ready for your 2023 taxes. While you prepare, consider your trust arrangements—What the new trust reporting rules mean and how they may impact your income tax return. Let's break it down by asking a few simple questions:
- Have you set up a trust arrangement to hold your family cottage?
- Did you set up a corporation to hold bare title to real estate so that it could be held separately from other real estate that you own?
- Have you set up an in-trust bank account for a child or grandchild?
- Are you a lawyer who has an arrangement to hold specifically identified client funds in trust until a transaction closes?
- Did you or your spouse transfer your investment portfolio or other assets to a trust?
If you answered yes to any of the questions, then you may have to file an income tax return for 2023 in respect of that trust arrangement, even if no income was earned in the trust, or if income earned will be reported by a financial institution to the account holder.
This is a new reporting requirement for many trust arrangements and 2023 is the first year of filing. Failure to file can result in significant penalties, including a penalty that is based on the value of the assets held in the trust each year.
Enhanced trust reporting rules were introduced in the 2018 federal budget as a way to provide more transparency to the federal government on how trusts are used, who benefits, who created them, and who controls Canadian trusts. The new rules are also imposed on certain non-resident trusts that are subject to Canadian tax under the general rules of the Income Tax Act. These new trust reporting requirements are causing concern over the breadth and depth of reporting that will be required for affected trusts beginning for trust years ended December 31, 2023. The form required to be filed is T3 Trust Income Tax and Information Return, or T3 Return.
For an overview of the old and new trust rules, please see our article: New trust reporting requirements are coming. This article explores certain requirements in more detail.
Express trusts
The legislation refers to express trusts that are resident in Canada, and for civil law purposes—a trust other than a trust that is established by law or by judgement.
The Canada Revenue Agency (CRA) states the following with respect to express trusts:
“An express trust is generally a trust created deliberately (with express intent), by a settlor, usually in writing. A settlor intends to set up a trust, transfers property to the trust, and identifies a beneficiary or beneficiaries. It is accepted at common law that an express trust cannot be established unless three certainties are present, namely the certainty of:
- the intent to create a trust,
- the property to be placed in trust, and
- the identity of the beneficiaries of the trust.”
The chart below lists common types of trust arrangements that individuals may be involved with. It is only meant to illustrate and does not include all possible types of arrangements.
| Description of trust or arrangement | Is a 2023 T3 return including enhanced reporting of trustees, beneficiaries, settlors, and other persons with authority required? |
|---|---|
Family trust established to own shares of family business |
|
Family trust owning family cottage | Yes |
Spousal or common-law trust | Yes |
Alter-ego trust | Yes |
Testamentary trust that is a graduated rate estate | No |
Testamentary trust that is not a graduated rate estate | Yes |
Qualified disability trust | No |
Registered education savings plan | No |
Registered retirement savings account | No |
Tax-free savings account | No |
First home savings account | No |
It is a question of fact whether a trust has been created when there is no trust deed. For example, where a bank account is established in trust for a minor, this could be an express trust. Please contact your BDO advisor if you wish to discuss this further, as the penalties for non-compliance if a trust is created and is required to file can be substantial – up to 5% of the maximum value of the assets held in the trust during the year.
Exemptions based on type of assets held, total value of assets, or date of creation of the trust
The legislation provides that a trust in existence for less than three months as of December 31, 2023, will be exempt from the new reporting introduced for 2023. In addition, where the maximum value of the assets is no more than $50,000 (CAD) at any time in the year AND where such assets are comprised only of money and certain exempt marketable securities throughout the year, if a trust return is otherwise required to be filed, the new detailed reporting of settlors, beneficiaries, trustees and other persons will not be required.
The chart below indicates whether certain assets are exempt as money or marketable securities:
| Description of security | Exempt security (Yes/No) |
|---|---|
Gold coin | Likely no (per a statement made by the CRA) |
Bank account holding only cash | Yes |
Shares, debt, or rights listed on a Canadian stock exchange or designated foreign exchange | Yes |
Share or unit of a mutual fund corporation or trust | Yes |
An interest in a related segregated fund trust | Yes |
A debt obligation guaranteed by the Government of Canada (such as a treasury bill), but not including deposits insured by the Canada Deposit Insurance Corporation | Yes |
A debt obligation guaranteed by the government or agent of a province, or by a municipality | Yes |
A guaranteed investment certificate issued by a Canadian bank | No |
Bare trusts
The term bare trust is not defined in the Act. However, it is generally considered to be an arrangement under which a trustee can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all of the trust 's property.
The CRA states that a trustee can reasonably be considered to act as an agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property.
Such trusts are specifically included in the new trust reporting rules, even though they do not have beneficial ownership of the property to which they have legal title.
Where a bare trust, or nominee, is a corporation, the corporation will be required to file both a T3 trust return and a T2 corporate income tax return.
The application of the new reporting rules to bare trusts is significant. Bare trusts are commonly used in many types of personal and commercial arrangements, such as joint ventures and real estate holdings, and can easily be overlooked because prior to the new reporting rules, tax filings for bare trusts were generally not required. Note that the new rules pertain only to trust reporting and do not change the income tax treatment of bare trusts.
Charities and endowments
The CRA has recently provided assurances that trusts that lie within a charity, such as an endowment fund, may be required at law to report under these new trust rules, but the CRA will administratively exempt these internal trusts from the requirement to file a T3 and the related information reporting.
The CRA states that exempt internal trusts would be those created when a charity:
- receives property as a gift that is subject to certain legally enforceable terms and conditions, and
- holds that property as the trustee of the trust.
Note that this statement was made to exempt internal trusts of charities. Not-for-profit organizations, (NPOs) were not included in the CRA’s exemption statement for charities even though NPO’s may have similar internal trusts. Although such internal trusts may not be as common in an NPO as in charities, it is possible that they exist. NPOs are generally exempt from tax and are specifically excluded from filing a trust return except in very specific circumstances. In fact, NPOs themselves are specifically excluded from the additional trust reporting. However, to the extent there is an internal trust within the NPO, the NPO is not exempt from filing a T3 and the related enhanced reporting with respect to that internal trust. The CRA may make an administrative statement to exempt such internal trusts, but to date, they have not made such a statement.
Trust account numbers and due date of return
Prior to making a T3 trust return filing for the first time, it will be necessary to first apply for a trust account number. This can be done online using one of three CRA services:
- My Account.
- My Business Account.
- Represent a client.
In addition, the form T3APP can be used to apply for a trust account number by mail.
The trust return is due 90 days after the end of the calendar year. In 2024, 90 days after December 31, 2023, is March 30. However, as March 30, 2024, falls on the Saturday of Easter weekend, the returns will be due on Tuesday April 2, 2024, which is the next government business day.
Penalties
There are very significant penalties for failure to file a trust return on time and failure to pay any taxes owing on time.
| Penalties | |
|---|---|
| Minimum penalties for filing a trust return late | |
a) If there is a balance due | 5% of the unpaid tax when the return was required to be filed plus 1% of such unpaid tax for each full month that the T3 return is late, to a maximum of 12 months. This penalty will be higher if there have been repeated failures to file. |
b) If there is no balance due | $25 a day for each day the return is late, from a minimum of $100 to a maximum of $2,500. |
Significant new penalty related to the enhanced trust reporting | |
Where failure to file made knowingly or due to gross negligence, or if a false statement or omission is made in the T3 return knowingly or under circumstances amounting to gross negligence. This is an additional penalty. | Greater than $2,500 or 5% of maximum value of the property held during the tax year by the trust. |
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.
How BDO can help
These T3 return requirements and the new requirement to disclose detailed information about the settlor, trustees, beneficiaries, and any other persons with authority over the trust creates a large burden on trustees for proper reporting on a timely basis. BDO can help you with fulfilling your reporting obligations.
If you have any questions, contact your local BDO advisor today.
The information in this publication is current as of November 15, 2023.
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.