New rules for trust reporting are coming for 2023 returns

Updated November 7, 2022

Important note: This blog was updated for the new coming into force date set out in Bill C-32 (Fall Economic Statement Implementation Act, 2022). Under the revised legislation, the trust reporting rules will now apply to trust taxation years that end after December 30, 2023.

Updates since November 7, 2022, posting

July 28, 2023: The CRA has released Schedule 15, Beneficial Ownership Information of a Trust, for which trustees must begin reporting beneficial ownership information under the expanded reporting regime for trusts.

The new regime will require most trusts to file a T3 Trust Income Tax and Information Return annually for tax years ending on or after December 31, 2023, including trusts that have never filed before. In addition, all affected trusts will be subject to enhanced reporting requirements. These rules were first announced in the 2018 federal budget and three versions of draft legislation were subsequently released – on July 27, 2018, February 4, 2022 and August 9, 2022. These rules were originally proposed to begin to apply for 2021 T3 returns, but implementation was deferred for one year in the August 9, 2022 legislation. The rules were deferred again on November 4, 2022 when Bill C-32 (Fall Economic Statement Implementation Act, 2022) was introduced and will now apply to taxation years that end after December 30, 2023. Otherwise, the revised legislation in Bill C-32 is largely unchanged. Similar rules also apply for Quebec purposes.  

According to the government, there are significant gaps in the information it currently collects about trusts through the tax system. The new rules are intended to close these gaps in line with other steps the government is taking to address tax evasion, money laundering and other financial crimes.

Given the extent of the changes and the severity of penalties for non-compliance, tax advisors and their clients should be getting ready to meet these new obligations for 2023  T3 returns, which are due in 2024.

This blog presents an overview of the new rules based on the legislation contained in Bill C-32, and some key issues to consider as you prepare your clients to comply with the new regime.

Current tax rules for trusts

Under current rules, a trust must generally file a T3 return for a tax year if the trust:

• has tax to pay for the year
• disposes of a capital property, or
• distributes all or part of its income or capital to its beneficiaries

The return must be filed within 90 days after the end of the trust’s tax year. No T3 return is currently required from trusts that are inactive or have no income or tax payable. In addition, trusts that are required to file a T3 return do not have to identify all of the trust’s beneficiaries. The Canada Revenue Agency (CRA)’s T3 guide sets out the current requirements in more detail.

New trust reporting rules 

Application

For taxation years ending after December 30, 2022 (basically 2022 and later tax years), the new reporting requirements would apply to “express trusts” that are resident in Canada and to non-resident trusts that are currently required to file a T3 return. An express trust is generally a trust created with the settlor's express intent, usually made in writing. In addition, as part of the February 4, 2022 draft legislation, subsection 150(1.3) of the Income Tax Act was proposed, which will subject so-called bare trust arrangements to the new reporting rules. This rule is also included in subsequent drafts of the legislation.

Some types of trusts are exempt from the proposals, including:

• trusts that have existed for less than three months
• trusts that hold less than $50,000 in assets throughout the tax year (as long as they only hold deposits, government debt obligations and listed securities)
• mutual fund trusts, segregated funds and master trusts
• trusts where all the units of which are listed on a designated stock exchange
• trusts governed by registered plans, including proposed first home savings accounts
• employer profit sharing plans
• lawyers’ general trust accounts
• graduated rate estates and qualified disability trusts
• trusts that qualify as non-profit organizations or registered charities
• employee life and health trusts
• certain government-funded trusts
• cemetery care trusts and trusts governed by eligible funeral arrangements

It should also be noted that a specific rule has been added to ensure that information that is subject to solicitor-client privilege does not have to be disclosed.

Expanded reporting requirements

Trusts that fall under the new rules would have to file a trust return and report additional information regarding all “reportable entities,” which include all the trust’s trustees, beneficiaries and settlors, as well as any person who has the ability (through the trust terms or a related agreement) to exert control or override trustee decisions on the appointment of the trust’s income or capital (e.g., a protector). Reportable entities can be individuals, trusts, corporations or other entities, and they include entities that qualified as reportable for only part of the year.

The additional information is to be provided on Schedule 15, Beneficial Ownership Information of a Trust and should be filed along with a T3 return. Some of the information to be reported for each reportable entity on Schedule 15 includes:

• name
• type and classification of entity
• address
• date of birth (if a natural person)
• country of residence
• taxpayer identification number, such as social insurance number, trust account number, business number or taxpayer identification number used in a foreign jurisdiction

Under these rules, beneficiaries include persons who currently have a right to income or capital as well as those having residual or contingent interests. As a result, some beneficiaries might not know that they have an interest in the trust, which could cause issues when collecting information from them.

A trust would be considered to have met the reporting requirements if it provides this information for each trust beneficiary whose identity is known or ascertainable, with reasonable effort at the time of filing. For beneficiaries whose identities are not known or ascertainable, a trust can comply by supplying sufficiently detailed information on the T3 return to determine with certainty whether any particular person is a beneficiary.

When identifying the settlors, keep in mind that the proposed rules use the definition in subsection 17(15) of the Income Tax Act, which includes both the legal settlor and any persons who transfer property to the trust (except commercial loans and transfers for value by an arm’s length person).

All this information must be collected for the first year of filing (2023) and reported to the CRA. For following years, we understand that trusts will only need to report modifications to this information, such as a name change and a person becoming or ceasing to be a reportable entity. Although this will ease the process in future years, a significant amount of work may be needed for the first filing.

Penalties

The current penalty for not filing a T3 return when required will continue to apply. It will also apply if the required additional information is not included with the return. The penalty is $25 for each day late, with a minimum penalty of $100 and a maximum of $2,500.

The new rules also impose a significant additional gross negligence penalty where a failure to file the return was made knowingly or due to gross negligence. The additional penalty would be five per cent of the maximum value of property held by the trust during the relevant year, with a minimum penalty of $2,500. This penalty would also apply to false statements and omissions amounting to gross negligence as well as a failure to respond to a CRA demand to file.

Some tips and reminders 

Identify all trusts that now have to file

As discussed above, trust returns will have to be filed in situations where filing was not required in the past, including trusts that do not have income or dispositions of property and bare trust arrangements that are deemed to be subject to the rules. In both cases, you may need to take extra steps to determine where these arrangements exist. Unfortunately, in the case of bare trust arrangements, this information may be difficult to find. One step to consider is checking with clients to determine whether key assets, such as real estate, is held under such an arrangement.

For trusts that don’t have income or dispositions of property on a regular basis, review organizational charts and identify trusts that did not have to file T3 returns before the new rules. Watch for trusts with material property but no income, such as trusts with personal-use property and estate freeze trusts where growth shares are put in a trust, but dividends are not paid. If a return has never been filed or not been filed recently, these trusts could be easily missed. It may also make sense to check in with your clients, especially new ones, to see if they have set up a trust for personal reasons, such as holding a vacation property.

Identify all relevant parties

Review trust documents in detail and ensure all relevant parties are identified. Be sure to go beyond the usual players to identify others such as residual or contingent beneficiaries, as these types of beneficiaries may be overlooked while the main beneficiaries are still alive. Also watch for loans and transfers from non-arm’s length parties that could deem them to be a settlor under these rules.

Communicate with affected clients and inform them of the new obligations

As discussed, it will be important to be able to show that you made a reasonable effort in gathering all the required information for reportable entities. In some cases, this may require contacting parties who are not aware of their interest in the trust.

Care will be required when using the $50,000 exception

As noted, trusts that hold specific property exclusively are exempt from the new rules, provided the property held is valued at less than $50,000. The exclusion does not apply if the limit is exceeded at any time during the year or if the trust, however briefly, holds other property (i.e., property that is not deposits, government debt obligations and/or listed securities). Given that the application of this exclusion may be limited and the potential penalties for not reporting (if it is mistakenly believed that an exemption applies), it may make sense to assume that none of your clients’ trusts that hold property are excepted.

We’ll keep you posted

Disclaimer

The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.