New Trust Reporting Rules for Taxation Years Ending After December 30, 2023

Overview

The new trust reporting rules, enacted in December 2022, are now in effect, for taxation years ending after December 30, 2023. The new rules will require a greater number of trusts to file both a T3 Trust Income Tax and Information Return (“T3 Return”) and a new Schedule 15 - Beneficial Ownership Information of a Trust (“Schedule 15”). Trustees of a wide variety of trusts, including bare trusts and non-resident trusts, now have the additional onus of determining which trusts (that were previously exempt from filing a T3 Return) are captured by the new rules.

If the new rules apply, trustees are required to gather and maintain information for each trustee, settlor, beneficiary and controlling person of trusts they manage, which may be particularly cumbersome where the trust has not filed a T3 Return in the past.

The New Reporting Rules

The Income Tax Act (Canada)^[1] requires a trust to file a T3 Return within 90 days following the end of its taxation year.^[2] Notwithstanding this requirement, prior to the implementation of the new trust reporting rules, several exemptions were available, such that a trust was only required to file a T3 Return for a taxation year if certain criteria were met. Examples of such criteria include where the trust had tax payable, was a Canadian-resident trust that disposed of capital property, was a deemed Canadian-resident trust, or received from the trust any income, gain or profit that was allocated to one or more beneficiaries (and certain other conditions applied).

The new rules have introduced three main changes to the trust reporting requirements. Effective for taxation years ending after December 30, 2023:

• all trusts will be required to file an annual T3 Return unless certain conditions are met;
• trusts that are required to file a T3 Return, other than listed trusts, generally need to complete Schedule 15 with their annual T3 Return to report beneficial ownership information; and
• Bare trusts are subject to the new reporting rules.

As such, certain trusts including express trusts (which are trusts created with the settlor's express intent as opposed to resulting or constructive trusts, or certain trusts deemed to arise under the provision of a statute) that previously were not required to file a T3 Return are now required to comply with the new reporting rules. Under the new rules, many informal trust and agency relationships may be required to file a T3 Return. For example, a T3 Return may need to be filed where:

• a parent corporation holds assets in trust for its subsidiary;
• a general partner in a limited partnership holds certain assets of the partnership;
• an individual purchases property in trust for an owner that is not clearly identified; or
• an individual is the registered titleholder of real estate they do not beneficially own.
  

Disclosure under the New Reporting Rules

Under the new rules, trusts that are required to file a T3 Return (with the exception of listed trusts) must disclose certain beneficial ownership information on Schedule 15, which requires information on all trustees, settlors, beneficiaries and controlling persons of the trust (collectively, the "reportable entities"). A “controlling person” of a trust is any person who has the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector). The definition of “settlor” for the purposes of T3 reporting includes any person or partnership that has loaned or transferred property, directly or indirectly in any manner whatever, to or for the benefit of the trust. Interestingly, this interpretation of the term “settlor” may be broad enough to capture individuals who undertook certain estate planning strategies such as an estate freeze, or those who provided even a nominal amount of money to a trust in a non-arm's length situation.

The following information must be provided for each “reportable entity”:

• name;
• address;
• date of birth (if applicable);
• country of residence; and
• Tax Identification Number (e.g., Social Insurance Number, Business Number).

Information must also be disclosed for any “unknown” beneficiaries that cannot be identified by name at the time of filing the T3 Return (e.g., any unborn children and grandchildren that would be included in any class of beneficiaries under the trust).

While the new rules do not require the disclosure of information that is subject to solicitor-client privilege, it will be up to the discretion of the taxpayer to determine whether they wish to assert privilege over any of the information that may otherwise be reportable under the new rules. This due diligence exercise will likely result in increased costs to assess the issues and determine the extent to which privilege should be claimed. Outside the context of an active tax audit, it would likely be time and labor intensive for taxpayers to determine which information should be claimed as privileged and many clients may not see the value of conducting such a review.

Requirements for Resident and Non-Resident Trusts

Pursuant to the new rules, trusts that are factually resident as well as deemed resident in Canada are required to file T3 Returns.

A trust will typically be considered factually resident in Canada if Canada is the jurisdiction where the “real business” of the trust is carried on, which is where the central management and control of the trust actually takes place.

Certain trusts that would otherwise be considered non-resident trusts may be deemed to be resident in Canada where there is either a “resident contributor” or a “resident beneficiary”. A resident contributor generally refers to a person that is, at that time, resident in Canada and a contributor to the trust. A “resident beneficiary” generally refers to a Canadian resident person that is, at the relevant time, a beneficiary under the trust if there is a connected contributor to the trust. A “connected contributor” is generally a person who made a contribution to the trust either while that person was resident in Canada or within 60 months of leaving Canada.

Finally, even foreign trusts may be subject to the new rules where one or more of the following apply:

• A person who is, or was, a resident of Canada transferred or loaned property to the trust;
• A Canadian resident is a beneficiary of the trust;
• The trust holds taxable Canadian property; or
• The trust carried on business in Canada in the year.

If any of the above apply, trustees should take care to determine if they are subject to the new reporting rules.

Exceptions from the New Reporting Rules

The new rules do not apply to a taxation year of a trust if the trust falls into one of the exceptions enumerated in subsection 150(1.2) (i.e., a listed trust). For example:

• A trust that has been in existence for less than three months at the end of the taxation year;
• A trust that holds assets with a total fair market value that does not exceed $50,000 throughout the taxation year, if the only assets held by the trust throughout the year are those specified in paragraph 150(1.2)(b);
• A trust that is classified as a registered charity;
• A trust that is classified as a club, society or association described in paragraph 149(1)(l); or
• A trust that is classified as a mutual fund trust.

Penalties

The new reporting rules also introduced significant penalties.Where a trust fails to file its T3 Return (including Schedule 15 thereto), the resulting penalty would be $25 for each day the T3 Return remains outstanding (the minimum penalty is $100 and the maximum penalty is $2,500). Where the failure to file is made knowingly or under circumstances amounting to gross negligence, the trust will be subject to an additional penalty of 5% of the maximum fair market value of the trust’s assets (with a minimum penalty of $2,500).

Implications and Relief for Bare Trusts

One of the most significant changes under the new reporting rules is their application to “bare trusts”. The term "bare trust" is not defined in the Act; however, a bare trust generally refers to a trust arrangement under which the trustee can reasonably be considered to act as agent for the beneficiaries of the trust with respect to all dealings with the trust's property. Previously, bare trusts were generally excluded from the T3 Return filing requirement, but under the new rules, a bare trust will be required to file a T3 Return unless an exemption applies.

However, on March 28, 2024, the Canada Revenue Agency (“CRA”) acknowledged that the new reporting requirements for bare trusts have had an unintended impact on Canadians and as such the CRA will not require bare trusts to file a T3 Return, including Schedule 15, for the 2023 taxation year, unless the CRA makes a direct request for these filings. This exception applies solely to bare trusts and is specific to the 2023 taxation year. The CRA’s rationale in providing this relief is that 2023 would have been the first taxation year in which bare trusts would have had a reporting obligation under the new rules and compliance with the new rules may have been overly burdensome for Canadian taxpayers. Over the coming months, the CRA will work with the Department of Finance to further clarify its guidance on this filing requirement for bare trusts and will communicate with Canadians as further information becomes available.^[3]

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