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As the Canadian government continues to strengthen its tax reporting regulations, new requirements have been implemented for trusts which are now in effect for the year ended December 31, 2023. These changes aim to enhance transparency and ensure compliance with tax obligations. It is essential for individuals and entities involved in trust arrangements to understand these new rules to ensure compliance and avoid penalties. In this article, we will provide a comprehensive overview of the New Trust Reporting Requirements in Canada. We will explore the definition of trusts, specifically focusing on bare trusts, and discuss the reporting obligations, exemptions, penalties for non-compliance, and future planning considerations.

What is a Trust?

Before delving into the specifics of the new trust reporting requirements, it is crucial to have a clear understanding of what a trust entails. In simple terms, a trust is a legal arrangement where the ownership of assets is transferred to a trustee who manages them on behalf of beneficiaries. Thus, the trustee holds the legal title to the assets, while the beneficiaries have the beneficial ownership.

Generally, a trust exists where the following three certainties are present:

  1. Certainty of intention - the individual (settlor) who transfers title to the property to the trustee must have the intention to set up a trust. The intention can be made orally or in writing.
  2. Certainty of subject matter - the written agreement must be specific with respect to property to be transferred to the trustee.
  3. Certainty of objects - there must be certainty of either the beneficiaries or the purpose of the trust must be sufficiently certain.

Types of Trusts

The two main categories of trusts are express trusts and bare trusts.

Express Trusts

Express trusts are formal trusts established with the intention of creating a trust arrangement. These trusts are established through formal agreements such as a trust deed that outlines the terms and conditions of the trust. Express trusts include:

  • Family Trusts
  • Alter Ego or Joint Partner Trusts

Bare Trusts

Bare trusts, also known as simple trusts or informal trusts are created when the parties involved do not explicitly intend to establish a trust but inadvertently do so through their actions. Hence why they are referred to as “informal trusts”. Unlike express trusts, bare trusts do not require a formal trust deed or agreement. They are characterized by the following key features:

  1. Legal Title vs. Beneficial Ownership: The trustee holds the legal title to the trust assets, but the beneficiary retains the beneficial ownership and control. This means that the beneficiary has the right to use, enjoy, and dispose of the assets as they see fit.
  2. Principal-Agent Relationship: The relationship between the trustee and beneficiary in a bare trust is often described as a principal-agent relationship. The trustee acts as an agent for the beneficiary, carrying out transactions and managing the assets based on the beneficiary's instructions.
  3. Lack of Discretion: Unlike other types of trusts, the trustee in a bare trust does not have any independent power or discretion over the trust assets. They must act in accordance with the beneficiary's wishes and instructions.

Examples of Bare Trusts

Image With Text Bare Trust

Bare trusts can arise in various situations and have different applications in estate planning, real estate transactions, and business arrangements. Here are some common examples of bare trusts:

  1. Joint Ownership of Real Estate: It is common for parents to add their children to the legal title of their real estate as joint owners. This arrangement helps reduce probate fees upon the parents' passing and simplifies estate administration. However, the children do not have full ownership rights until their parents' passing, making this arrangement a bare trust.
  2. Bank and Investment Accounts: As parents age, they often add their children to their bank and investment accounts for ease of financial management and estate planning purposes. These accounts can be considered bare trusts as the children hold legal title to the account but are not the beneficial owners until the parents' passing. The only exemption to filing in this scenario would be if you meet the exemption of $50,000 as outlined below.
  3. Holding in Trust For Accounts: Trust arrangements where assets are held in trust for children, grandchildren, or other beneficiaries until they reach a certain age also fall under the category of bare trusts. These accounts are commonly used to protect and manage assets for minors until they become adults. The only exemption to filing in this scenario would also be if you meet the exemption of $50,000 as outlined below.
  4. Real Estate Financing: In some cases, a child may add a parent to the title of their real estate to obtain financing or other financial benefits. This arrangement creates a bare trust, with the parent acting as the trustee and the child as the beneficiary.
  5. Real Estate Transactions: It is common in real estate investments for a nominee corporation to hold the legal title of the property in trust for the beneficial owner for commercial reasons.
  6. Corporate Reorganizations: During corporate reorganizations, it is common to transfer the beneficial ownership of real estate from one taxpayer to a corporation. This arrangement can be structured as a bare trust, allowing for the transfer of ownership without triggering taxes or fees.
  7. Joint Ventures and Partnerships: Legal title for real estate or other assets held on behalf of a group of owners in a joint venture or partnership can be considered a bare trust, as the beneficiaries have the full beneficial ownership and control. The trustee acts as a custodian, holding the assets for the benefit of the individuals involved in the joint venture or partnership.

It is important to note that these examples are not exhaustive, and there may be other scenarios where a bare trust exists and requires reporting.

Understanding the New Trust Reporting Requirements

Previously, a trust was only obligated to file a T3 trust return if the trust owed income tax for the year, or if the trust realized a capital gain or disposed of capital property during the year. This meant a lot of informal trusts such as bare trusts that were created were not required to file as the trust would not owe any tax during the year.

Under the new rules, all express and bare trusts are now required to submit a T3 trust return. This means that even if a trust is inactive or has not generated income in a particular tax year, it must still fulfill the filing obligations. This expands the scope of trust reporting and aims to capture all formal and informal trusts that may have previously gone unnoticed or were exempt from filing.

In addition to the new requirement to file, detailed information is required and should be reported for each trustee, beneficiary, settlor, and any other person who can exert control or override trustee decisions concerning the allocation of the trust's income or capital (i.e advisor). This information should include:

  • Full name and address
  • Date of birth
  • Country/jurisdiction of residence
  • Taxpayer identification, for example, SIN, trust account number, business number, or a taxpayer ID used in a foreign jurisdiction

The due date for filing the trust tax return is 90 days after the end of the trust's year-end. For most trusts with a December 31st fiscal year-end, the due date for the 2023 tax year is March 30, 2024. For 2023 tax year only, the deadline has been extended to April 2, 2024.

Exemptions from Reporting Requirements

Image With Text Exemptions

While the new trust reporting requirements apply to many bare trusts, there are certain exceptions outlined by the Canada Revenue Agency (CRA). The following types of trusts are not required to provide additional information:

  1. Trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts) 
  2. Mutual fund trusts, segregated funds and master trusts.
  3. Lawyers' general trust accounts: Funds held in trust accounts by lawyers that are required under the professional conduct rules for a purpose that is regulated under these rules. However, if they are client-specific trust accounts (i.e client funds held in trust such as real estate proceeds, retainers, trust settlement amounts, investment funds that are administered by the lawyer on behalf of clients, withholding taxes kept in trust until the CRA provides a compliance certificate etc.), they would not meet this exemption and would fall under the new trust reporting rules. The only exception to this would be if the trust has been in existence for less than three months or it it holds less than $50,000 fair market value in assets. The new trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege. 
  4. Graduated rate estates and qualified disability trusts: Trusts created for the benefit of individuals who have passed away or individuals with disabilities.
  5. Non-profit organizations or registered charities: Trusts that qualify as non-profit organizations or registered charities are exempt from the new reporting requirements.
  6. Trusts in existence for less than three months: Trusts that have been in existence for less than three months at the end of the year are not required to provide additional information.
  7. Trusts with assets below $50,000: Trusts that hold assets with a total fair market value of less than $50,000 throughout the taxation year are exempt from the filing requirements. The assets being held are limited to cash, government debt obligations, and listed securities such as public company shares, mutual funds and segregated funds.

It is essential to consult with a tax professional or legal advisor to determine if your trust falls within any of these exceptions and is not subject to the new reporting obligations.

Penalties for Non-Compliance

The CRA imposes penalties for late filing or non-filing of trust tax returns. The penalties can be significant and may vary depending on the circumstances. Here are some key penalties to be aware of:

  1. Late filing penalty: If the trust tax return is filed after the specified due date, a late filing penalty may apply. The penalty is generally calculated at $25 per day late, up to a maximum of $2,500 per year.
  2. Penalty for gross negligence: In cases of gross negligence, where there is a willful disregard for the reporting requirements, a penalty equal to the greater of $2,500 or 5% of the highest fair value of the trust's assets during the year may be imposed.

To avoid these penalties, it is essential to file the trust tax return on time and ensure all required information is accurately reported.

Future Planning and Considerations

To minimize future reporting obligations and streamline trust structures, there are some practical steps that can be taken:

  1. Review the purpose of the trust: Trustees should periodically review the purpose and necessity of the trust. If a trust no longer serves its intended purpose, consider winding it up or closing any in-trust accounts that are no longer necessary. By taking these steps, future reporting obligations can be reduced.
  2. Restructure existing trusts: If certain beneficiaries are no longer required or relevant, consider restructuring the trust to remove them. This can help avoid the need to disclose their information in future reporting. However, it is important to note that reporting obligations may still exist for periods during which beneficiaries were involved.

Engaging the services of a tax professional with expertise in trusts and tax planning can provide valuable guidance in ensuring proper trust structuring and compliance with reporting requirements.

Conclusion

The introduction of new trust reporting requirements in Canada has brought about significant changes in the landscape of trust administration and tax compliance. Trustees, beneficiaries, and settlors must be aware of their obligations under these new rules to ensure compliance, avoid penalties, and maintain the integrity of their trust structures.

This comprehensive guide has provided a thorough overview of the new trust reporting requirements, covering topics such as the definition and purpose of trusts, the concept of bare trusts, the detailed reporting requirements, exemptions, implications for different types of trusts, and future planning considerations.

By adhering to these requirements and maintaining ongoing compliance, trust beneficiaries and trustees can avoid penalties and ensure the smooth operation of their trusts. Trust filers are encouraged to seek professional advice to navigate the complexities of trust reporting and ensure compliance with the new rules.

If you are looking for a tax accountant to help file your trust returns under the new rules, contact us today. We are a full-service accounting firm in Hamilton that have experienced tax specialists to meet all your tax needs.

If you want to learn more about other tax and accounting topics, explore the rest of our blog!

Frequently Asked Questions

1. Is a trustee of a bare trust that owns legal title to a residential property in Canada required to also file an Underused Housing Tax (UHT) return?

Yes, the CRA interprets the word trust to include a bare trust and interprets the word trustee to include a trustee of a bare trust. Hence a trustee of a bare trust will need to file a UHT return.

2. If the trustee of a bare trust files the UHT return, do they also need to file a trust return?

Yes. Per CRA, the UHT-2900 Underused Housing Tax Return is separate from the new trust reporting regulations. Filing a UHT-2900 does not fulfill the requirement to submit a T3 Return and Schedule 15. Hence, the trust remains obligated to adhere to the new trust reporting rules.


Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting/tax professionals. NBG Chartered Professional Accountant Professional Corporation will not be held liable for any problems that arise from the usage of the information provided on this page.

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Written by Neena Gambhir

I'm a Chartered Professional Accountant and have been navigating the waters of public accounting for over a decade. I've had the privilege to work with all sorts of clients – from small family-owned businesses to those big names on the stock exchange, spanning various sectors. Through these experiences, I've gathered a ton of knowledge, especially when it comes to Canadian corporate and individual taxes. I've also got a solid handle on the ins and outs of partnership, trust, and estate taxes.

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