Dear clients and contacts of LCA,

We have previously written about the new trust reporting rules which impose additional filing requirements for most trusts, many of which were previously exempt from filing a T3 Trust and Income Tax Return with CRA. We want to remind you of the new rules that are in effect for taxation years ending on or after December 31, 2023, as pending due dates approach.

In addition to expanding the information reporting requirements on trusts, the types of trusts subject to the new rules have been greatly expanded to include express trusts that were previously exempt from filing, as well as bare trusts that were formerly disregarded for Canadian tax purposes. 

The new rules are applicable to trusts with tax years ending on and after December 31st, 2023. Since all affected trusts are considered to have a calendar year end, these rules potentially impact any trust in existence during the 2023 calendar year.  

Please note significant penalties apply for non-compliance, up to a maximum of 5% of the highest fair market value of the assets held within the trust.

These penalties can be very significant and punitive in many situations, particularly for trusts holding valuable assets such as real estate. 

To assess whether these filing obligations apply in a particular situation, it is important to determine whether an express and/or bare trust arrangement exists: 

1.  Express trust arrangements: Express trust arrangements are created with express intent, usually with a written trust agreement, deed, or will, providing a trustee with management responsibilities over assets on behalf of beneficiaries.

2.  Express trust arrangements include both inter-vivos trusts, created during a settlor’s lifetime, and testamentary trusts created by will or court order as a result of an individual’s death.

Common examples of express inter-vivos trusts include family trusts (for example, trusts set up to hold family wealth (i.e. personal use property such as residences; private companies; and/or other assets)), alter ego trusts, joint spousal / common law partner trusts, etc.

Common examples of express testamentary trusts include graduated rate estates, testamentary spousal / common law partner trusts, etc. 

CRA previously had policies which allowed many express trusts to not file returns annually if they had no taxes payable or dispositions, and did not provide benefits or income allocations to beneficiaries for the year.   However, for 2023 and onwards these trusts will generally need to file T3 returns as an information filing regardless of whether there are any income or capital disposition transactions to report.

3.  Bare trust and other trust arrangements: A bare trust refers to an arrangement where a trustee holds legal ownership of property on behalf of beneficial owners, but simply acts as agent for the beneficial owners, following their instructions with respect to dealing with the trust’s property. 

4.  Some common examples of bare trust arrangements include the following: 

a.  Nominee Corporations:  Companies owning real estate on behalf of Individual(s), corporation(s), partnership(s), or trust(s).   

b.  Nominee corporations are commonly used in real estate structures to simplify ownership and provide flexibility where multiple owners are involved, facilitate property transfers, and maintain anonymity from public land registration records.

c.  Legal owners differing from beneficial owners registered on title for financing or estate planning purposes.

d.  For example, where a parent, grandparent, or other person is listed on legal title to meet mortgage financing requirements, or alternatively children are added to title of their parent’s house for probate planning purposes.

e.  In-Trust-For (“ITF”) bank/investment accounts, or informal trust arrangements whereby assets in an account are held on behalf of someone else*.

f.  Common arrangements set up by parents, grandparents, or other persons on behalf of minors who do not have legal capacity to enter into contracts on their own, are examples of ITF accounts.

*A possible filing exemption exists that may apply to ITF accounts with balances not exceeding $50,000 fair market value, and consisting exclusively of cash and certain exempt marketable securities throughout the taxation year.

The filing due date for trusts with a December 31, 2023 year-end will be April 2, 2024.

Where an express or bare trust arrangement is identified, please contact your LCA representative as soon as possible so we can advise on your particular situation and obtain the information to prepare the required filings by the due date. 

Please note that although CRA has indicated that bare trusts (only) will be provided administrative relief from certain penalties for late-filed 2023 T3 filings, LCA recommends that bare trusts nevertheless make every effort to file on time. CRA limits the administrative relief for bare trusts, noting that failures to file made knowingly or due to gross negligence may still be penalized. 

Should further guidance be required with respect to the new trust reporting rules, please contact your LCA representative for further assistance.