Note: This is an update to our article that was originally published on December 13, 2021.
The new reporting requirements for trusts, applicable to T3 returns that are due on March 31, 2023, have been clarified by the Department of Finance. These requirements apply to express trusts resident in Canada, all non-resident trusts that currently must file a T3 return and bare trusts.
The most significant change is the requirement for bare trusts to file a T3 return. This a new requirement for a commonly used structure that previously had no reporting requirements to the Canada Revenue Agency (CRA).
What is an express trust?
An express trust is generally a trust created with the settlor’s express intent, usually made in writing, such as through a trust deed or a will. The “settlor” is a person or partnership who has loaned property or transferred property, directly or indirectly in any matter whatever, to a trust for the benefit of the trust at or before the taxation year end.
Certain trusts will continue to be exempt from these new reporting requirements including:
- Certain regulated trusts, such as a lawyer’s general trust account
- Trusts that have been in existence for less than three months
- Trusts that hold assets with a maximum of $50,000 in fair market value throughout the year, however the assets must be limited to deposits, government debt obligations and listed securities
- Graduated rate estates
- Qualified disability trusts
- Employee life and health trusts
- Trusts under an employee profit sharing plan
- Cemetery care trusts and trusts governed by eligible funeral arrangements
What is a bare trust?
A bare trust is generally a trust relationship with the following characteristics:
- the trustee has no significant powers or responsibilities and can take no action without instructions from the beneficial owner of the property;
- the trustee’s only function is to hold legal title to the property; and
- the settlor (or settlors) is the sole beneficiary and can cause the property to revert to them at any time.
Bare trusts are commonly used in a variety of situations such as:
- Holding investments (e.g., public company shares) in trust for another individual (e.g., a minor)
- Holding legal title to real estate as part of corporate reorganizations and joint venture arrangements
- Shelter assets from estate administration tax (i.e., probate) as part of estate planning
What is the reporting requirement?
Despite their prevalence, bare trust relationships have traditionally been ignored for income tax purposes and their existence is generally not reported to the CRA. All dealings with the trust property are attributed to the settlor/beneficial owner who is the relevant “taxpayer” and who must personally report all income, losses, terminal losses, recapture, gains, etc. in respect of the property. The proposed amendments deal only with reporting obligations and will not alter the income tax treatment of any bare trust.
Under the new rules, the T3 return must include a schedule providing the name, address, date of birth, jurisdiction of residence and identification number (SIN or Foreign ID) of:
- Settlor of the trust
- Each person who has the ability (through the trust terms or related agreement) to exert control or override the trustee decisions over the appointment of income or capital of the trust (e.g., a protector)
What are the penalties for failure to file?
The penalties for failure to file the T3 return, including the new information schedule, will be $25 per day (minimum $100) up to a maximum penalty of $2,500.
In addition, if a person knowingly or under circumstances amounting to gross negligence, makes a false statement or omission (including the new reporting requirements) in a T3 return, fails to file a return when required, or fails to comply with a demand to file a return an additional penalty will apply. The additional penalty (gross negligence penalty) is 5% of the highest fair market value of property held in trust in the year (minimum penalty $2,500). This penalty is significant and is of particular concern for real estate bare trustee situations. For example, in the case of a corporate bare trustee holding legal title to a commercial office building in Toronto worth $60 million and the penalty clause applies, the penalty could be $3 Million.
Please connect with Lott & Company to discuss how the new reporting requirements may affect your tax compliance obligations.