February 8, 2024
Canada's new trust reporting requirements discussed; rules are broader than anticipated
Legislative amendments enacted in December 2022 require many trusts, including many agency and other commercial arrangements, to comply with additional reporting requirements in their annual income tax return for tax years ending after 30 December 2023. The new rules, which include comprehensive disclosure requirements, also apply to bare trusts that are resident or deemed resident in Canada and other informal trust and agency relationships that were in existence at any time during the 2023 calendar year.
The new requirements have very broad application and will capture many common commercial arrangements even when no tax or income reporting is at stake.1
Trusts that historically had to file an annual income tax return will now have additional disclosure obligations, and many trusts that were previously disregarded for income tax reporting purposes will now have a filing obligation. Significant uncapped penalties may apply for noncompliance.
Because all trusts affected by the new requirements have a calendar year-end, the new rules effectively apply for the 2023 and later tax years. A trust with a calendar year-end must file its income tax return for the 2023 tax year by 30 March 20242, and this return must include new information required under these rules.
With the 2023 filing deadline fast approaching, taxpayers are advised to carefully review their trust arrangements to determine if the new reporting requirements apply to them.
New filing and additional reporting requirements
Under the Income Tax Act (the Act), a trust is required to file an annual income tax return, the T3 Trust Income Tax and Information Return (T3 return), within 90 days of the end of its tax year, which in most cases is a calendar year. However, prior to the 2023 tax year, there were several statutory and administrative exceptions to this filing requirement. Generally, a trust would only have to file a T3 return for a tax year if any one of several criteria was met (e.g., the trust had tax payable, or it had realized a taxable capital gain).3
T3 return filing and additional information reporting are now required on an annual basis for express trusts (i.e., trusts that are created with the settlor's express written or verbal intent, as opposed to other trusts arising by operation of law) that are resident in Canada or deemed resident in Canada, subject to certain exceptions (see below), effective for tax years ending on or after 31 December 2023.4 Therefore, the new rules increase the compliance burden for existing trusts and create an annual T3 return filing requirement for many trusts that were previously not required to file a T3 return.
Under the new rules, trusts subject to the additional reporting requirements must report and disclose the following information for each trustee, beneficiary and settlor of the trust, as well as any person who has the ability, as a result of the trust terms or a related agreement, to exert influence over trustee decisions regarding the allocation of trust income or capital in a year (e.g., a protector of the trust):
In addition, information must be included regarding any beneficiaries that cannot be listed by name (e.g., unborn children and grandchildren) because they are unknown at the time of filing the T3 return.
Notably, the definition of "settlor" for these purposes 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. This definition may be broad enough to capture individuals who undertook common Canadian tax and estate planning strategies, such as an estate freeze, or those who loaned even a nominal amount of money to a trust with which they do not deal at arm's length.
A new beneficial ownership schedule, T3 Schedule 15, Beneficial Ownership Information of a Trust, has been added to the T3 return to report the required information. For Québec tax purposes, express trusts are also required to file an annual Québec TP-646-V, Trust Income Tax Return, for tax years ending after 30 December 2023, subject to the same specified exceptions as under the federal requirements. The beneficial ownership information is, however, provided directly on the TP-646-V return rather than in a separate schedule.
The new rules do not require the disclosure of information that is subject to solicitor-client privilege; however, that does not absolve a trust of the requirement to file or disclose its arrangements (e.g., the potential need to file using anonymized data).
One of the most significant changes is that the new reporting requirements also apply to so-called "bare trusts." A bare trust includes an arrangement in which the trust can reasonably be considered to act as agent for its beneficiary(ies) with respect to all dealings in all the trust's property. Prior to 31 December 2023, bare trusts were effectively excluded from the T3 return filing requirement; however, under the new rules, a bare trust will be required to file an annual T3 return unless an exemption applies. Under the expanded requirements, many other informal trust and agency relationships may now require an annual T3 return. Following are examples of situations in which a T3 return may now be required:
The above is not an exhaustive list and, therefore, legal counsel should be consulted to identify all informal trust arrangements and instances of bare trust or nominee/agency relationships that may now require a T3 return.
New penalties have been introduced for failing to file a T3 return (including the Schedule 15 beneficial ownership schedule) or failing to provide required information on a T3 return if the omission was made knowingly or was due to gross negligence. These new penalties can be severe and are equal to the greater of CA$2,500 and 5% of the highest total fair market value of all property held by the trust in the year, with no maximum penalty.
This new penalty may apply even if all the income from the arrangement has otherwise been appropriately reported. For Québec tax purposes, it is proposed that the amount of the penalty will be equal to CA$1,000 plus CA$100 for each day the failure to file continues, up to CA$5,000. Existing penalties for late filing a T3 return continue to apply. 5
On 1 December 2023, the Canada Revenue Agency (CRA) announced that it will temporarily waive the late-filing penalty for the 2023 tax year for bare trusts (and only bare trusts) that file their T3 return and Schedule 15 after the 30 March 2024 filing deadline. The CRA noted that it is providing this administrative relief because this is the first tax year in which bare trusts will have a T3 filing requirement under the new reporting requirements. However, the CRA also stated that this relief only applies to the 2023 tax year and if the taxpayer knowingly, or due to gross negligence, failed to file by the applicable deadline, the steeper penalty provisions noted above may still apply. Taxpayers are encouraged to timely file their T3 returns given that the unrelieved penalties are based on the highest total fair market value of all property held by the trust in the year with no maximum penalty amount.
Exceptions from the additional reporting
Certain types of trusts are excluded from these additional reporting requirements under new subsection 150(1.2), including trusts that:
For details, and for a more comprehensive list of the exceptions from the new reporting requirements, see EY Global Tax Alert, Canada's new trust reporting requirements apply for first time to 2023 tax year, dated 20 November 2023.
As 2023 is the first tax year that affected trusts need to comply with the new additional reporting requirements, and the additional information is required to be included in the 2023 T3 return that must be filed by 30 March 2024, steps should be taken now to gather the new required information with respect to settlors, trustees, beneficiaries and persons able to exert influence over trustee decisions over the allocation of trust income or capital.
Additionally, care and due diligence need to be exercised to identify those trusts and other informal trusts and agency relationships, such as bare trusts, that were previously administratively exempt from filing a T3 return but now face a filing requirement under the new rules. In this case, all required information under the additional reporting requirements as well as other information relevant for the T3 return need to be compiled as soon as possible.