Financial advisors should help clients identify their reporting obligations under the federal government’s expanded trust reporting rules, which apply more broadly and require more information from trustees.
And while the Canada Revenue Agency (CRA) is providing temporary relief from penalties for bare trusts that file late for the 2023 tax year, the filing requirement nevertheless remains.
The new rules — effective for trusts with year ends of Dec. 31, 2023, and after — apply to more types of trusts, including bare trusts. Trustees also are required to report information such as the names, addresses and social insurance numbers of beneficiaries and other parties connected to a trust.
Trustees affected by the new rules must file a T3 trust return along with a new Schedule 15 beneficial information return by the filing deadline of March 30 (April 2 in 2024).
“You don’t want to be waiting until the last minute [to collect the data],” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S. Trustees may find that beneficiaries of the trust are unreachable, unresponsive or unwilling to provide the information. If a beneficiary’s data is unavailable, “you want to document that you made a reasonable attempt.”
“Most bare trusts are not formally documented — there’s no trust indenture that goes along with them in the same way that, say, a family trust might have,” said Stephen Latimer, tax partner with Grant Thornton LLP in Halifax. “The big risk here is that a lot of clients may not recall putting these bare trusts in place.”
In guidance released Dec. 1, the CRA indicated there will be no penalties for filing a trust return and a Schedule 15 for bare trusts after the deadline for the 2023 tax year only. However, the filing requirement remains in effect. If the failure to file is made knowingly or due to gross negligence, penalties may apply, the CRA stated.
“CRA recognizes that the 2023 tax year will be the first time that bare trusts will have a requirement to file a T3 return including the new Schedule 15,” the agency said. “As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing proactive relief.”
The new reporting rules also include a new penalty for failing to file: $2,500 or 5% of the property’s value, whichever is greater, in addition to existing penalties for failure to file a trust return.
Advisors should be “asking [clients] questions about [whether they have] any trusts that have been settled in the past that we’re not aware of — making sure we’re flushing that information out — to protect them from those non-compliance penalties,” Latimer said.
In December 2022, Ottawa passed legislation to expand the trust reporting rules to include express trusts (created with a settlor’s express intent) and bare trusts (in which a trustee’s only duty is to transfer property to a beneficiary on demand). Previously, only trusts with taxes payable for the year or those that disposed of capital property had to file an annual trust return.
Many clients will have a reporting obligation and not know it, Oakey said.
For example, a parent co-signing a mortgage with an adult child might constitute a bare trust, with the parent being the legal owner of the property and the child the beneficial owner.
Common trusts set up for estate planning purposes, such as alter ego, joint partner and spousal trusts also now have a reporting requirement.
The rules may extend to trusts set up to facilitate financial transactions, Oakey said. For example, while a lawyer’s general trust account is exempt from the reporting rules, a specific trust account a lawyer established for a client must report unless the information is subject to solicitor/client privilege.
“If you’re buying [property] from me and you put [down a] $100,000 deposit, and it goes into the lawyer’s specific trust account, that’s a [reportable] trust,” Oakey said.
The CRA isn’t prescribing how trustees obtain information about settlors or beneficiaries for reporting purposes; only that reasonable efforts be made. In practice, trustees probably will have to contact beneficiaries, including contingent beneficiaries with only a remote chance of receiving a distribution, to get information such as addresses and social insurance numbers, thus alerting them to the fact that they are beneficiaries.
“It could create some awkward discussions within families,” Latimer said, with some beneficiaries wanting more information about their interest. “There could be a sense of entitlement.”
A previously unaware beneficiary could attempt to make a claim against the trust, Oakey suggested, if they felt the trustee was in breach of duty.
In an email to Investment Executive, the CRA stated that it would use the information collected through the new reporting regime to “enhance its business intelligence and risk assessment processes. The information will be used to identify previously unknown taxpayer relationships, confirm existing ones, and increase the CRA’s capacity for better detection of non-compliance, including tax avoidance planning.”
Kevin Wark, a tax advisor with the Conference for Advanced Life Underwriting in Toronto, said in an email that he anticipates the CRA will focus particularly on reporting related to bare trusts.
“In particular, bare trusts may be subject [to] review, as they would not in the past have been filing T3 returns and, in effect, are operating under the radar,” Wark said. “[The CRA] may also use the information to go back to earlier taxation years of specific types of trusts to ensure proper tax reporting.”
Oakey said the CRA also could cross-reference beneficial trust ownership information it receives through the new reporting with corporate ownership data to identify “associated companies” for the purposes of sharing access to the small-business deduction on the first $500,000 of active business income.
Latimer said this could result in an unpleasant surprise for business owners who didn’t previously know they were a trust beneficiary: “All of a sudden, it’s between the parties to decide who gets [access to] the small-business deduction.”
Wark said the new reporting rules could result in clients winding up certain trusts rather than contending with annual compliance costs and CRA scrutiny.
Latimer said compliance costs are likely to be higher in the first year, due to the effort needed to collect data, but probably would decrease in subsequent years when a quick confirmation that information hasn’t changed is likely to be sufficient.
“Trusts are still really, really good planning tools,” Latimer said. “I’m certainly advising my clients that when it made sense to use trusts in the past, it likely still does today. You just have to be aware in advance that there’s some extra reporting to go along with that.”
The expanded trust reporting rules
The federal government first proposed stricter trust reporting rules in the 2018 federal budget to help combat “aggressive tax avoidance, tax evasion, money laundering and other criminal activities” and as part of Canada’s international commitment to the transparency of beneficial ownership.
The expanded trust reporting rules originally were meant to be effective for trusts with Dec. 31, 2021, year ends and after, but the effective date was delayed twice, pending the passage of enabling legislation late last year.
Under previous legislation, generally only trusts with taxes payable for the year or those that disposed of capital property needed to file an annual trust income tax return (T3).
The change in reporting requirements means that affected trusts must now file a T3: Trust income tax and information return and a Schedule 15: Beneficial Ownership Information of a Trust with the Canada Revenue Agency (CRA) every year. The new rules require trusts to identify all beneficiaries, trustees, settlors and/or protectors of the trust, including their addresses, date of birth and taxpayer identification number, such as a social insurance number.
Certain trusts are excluded from the scope of the expanded rules. These include: graduated rate estates; qualified disability trusts; mutual fund trusts and registered plans; trusts in existence for less than three months; and trusts with less than $50,000 in asset value — as long as those assets consist only of cash and securities traded on a designated exchange (and other certain assets).
In addition to the existing penalty for failing to file a T3 return on time — $25 a day, with a minimum penalty of $100 and to a maximum of $2,500 — the new reporting rules introduce an additional penalty for deliberately not filing or for gross negligence: $2,500 or 5% of the property’s value, whichever is greater.
The deadline for filing a T3 return is 90 days after the trust’s year end. For trusts with a 2023 calendar year end, the deadline for filing the return is March 30, 2024. However, as that’s a Saturday and April 1 is Easter Monday, the CRA said it will consider the T3 return to be filed on time if the agency receives it, or it’s postmarked, by Tues., April 2.
A version of this story will appear in the December issue of Investment Executive.