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March 15, 2024

Canada Revenue updates penalty relief guidance for late bare trust T3 filings

On 12 March 2024, the Canada Revenue Agency (CRA) released updated administrative guidance on how it intends to apply an "education-first" approach to the application of significant late-filing penalties in respect of bare trusts.

Legislative amendments enacted in December 2022 require many trusts, including bare trusts and other informal trust relationships, to file an annual T3 trust income tax and information return (T3 return).

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 2 April 2024,1 and this return must include new information required under these rules.2

Penalty framework

A new penalty framework for trusts was introduced under subsections 163(5) and (6) of the Income Tax Act (the Act) and applies to any person or partnership that (i) is subject to the additional reporting requirements in new section 204.2 of the Income Tax Regulations and (ii) fails to file a T3 return (including the Schedule 15 beneficial ownership schedule) for the tax year, effective for tax years ending after 30 December 2023. These penalties are equal to the greater of $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.

Of specific concern to taxpayers has been the language contained in subsection 163(5), which could apply the penalty framework under circumstances where the taxpayer "knowingly or under circumstances amounting to gross negligence" failed to file a return.

As the new T3 return filing obligations have been expanded to include an entire population of arrangements, many taxpayers could be aware of their obligation to file the tax returns but nonetheless struggling to meet the compliance requirements, due to the volume of expanded tax returns and/or the inability to obtain information about known persons for whom disclosures are required on the new Schedule 15. Additionally, other taxpayers are still in the process of determining if certain arrangements constitute a bare trust (subject to the T3 return filing requirement) and may, therefore, need additional time to consult with their legal counsel to reach a conclusion.

Administrative relief

On 12 March 2024, the CRA updated sections of its web page, "New reporting requirements for trusts: T3 returns filed for tax years ending after December 30, 2023," which provides administrative guidance associated with the new trust filing obligations.

Specifically, Section 3.5 of the CRA's guidance was updated to address the intended application of the expanded penalty framework associated with subsections 163(5) and (6) of the Act.

The text of the CRA's update reads as follows:

As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing relief to bare trusts by waiving the penalty payable under subsection 162(7) of the Income Tax Act for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline for reasons other than gross negligence. For the 2023 tax year, where the tax year of the trust ends on December 31, 2023, the filing deadline of March 30, 2024, is extended to April 2, 2024, the first business day after the deadline.

This proactive relief is for bare trusts only and only for the 2023 tax year.

While the Act also includes a gross negligence penalty under subsection 163(5), as part of the CRA's education-first approach, the CRA will only apply this penalty in the most egregious cases where a bare trust fails to file. Imposing such penalty would only occur in the context of a compliance action, such as an audit, where all factors and circumstances of the taxpayer's particular situation are considered together. A gross negligence penalty for failing to file will be subject to oversight and approval by Headquarters, following a mandatory referral.

Under the Act, the gross negligence penalty is equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.


The updated administrative guidance represents welcome relief to taxpayers. However, two key issues remain:

  1. Trusts remain statutorily obligated to timely file tax returns, albeit potentially not subject to penalties if filing late under circumstances that do not amount to gross negligence. The updated guidance does not represent a formal filing extension and does not parallel administrative relief provided for the first year of Underused Housing Tax filings (extensions were granted in advance of the Underused Housing Tax filing deadline).
  2. Taxpayers should assess their individual situations and consult with their legal or tax advisors to understand the extent of the implications associated with a failure to file the bare trust tax return by the filing deadline. An assessment of the overall tax compliance history could identify instances of noncompliance in other areas, such as unreported income or the failure to file information returns in an agent/nominee capacity.

For greater certainty, agents and nominees have always been required to file T3 returns, T5 information returns or T5013 information returns under the Income Tax Regulations for various forms of income generated on investments held in trust for an ultimate beneficial owner.3 Identification of various bare trust and nominee arrangements with a view to complying with the new expanded Schedule 15 disclosure requirements may uncover instances of noncompliance with various historically required information returns. Voluntary Disclosure Program applications may be a relevant consideration in addressing penalty exposure.

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1 Because 30 March 2024 occurs on a Saturday, the filing deadline is administratively deferred to the next business day, 2 April 2024.

2 For more information on the history of the new requirements, see these EY Global Tax Alerts: Finance Canada releases proposals regarding additional reporting requirements for trusts, dated 10 February 2022; Canada's Department of Finance releases draft legislation for remaining 2022 budget measures, dated 16 August 2022; and Canada | Bill C-32 to implement certain Budget 2022 and other previously announced measures receives Royal Assent, dated 21 December 2022. For information on the application of the new rules, see these EY Global Tax Alerts: Canada's new trust reporting requirements apply for first time to 2023 tax year, dated 20 November 2023; Canada's new trust reporting requirements to impact many foreign trusts, dated 5 February 2024; and Canada's new trust reporting requirements discussed; rules are broader than anticipated, dated 8 February 2024.

3 Subsections 204(1), 201(2) and 229(2) of the Income Tax Regulations require an agent to file a T3, T5 and T5013 information return, respectively, under an agency or nominee relationship.

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Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young LLP, Canada

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor