The Canada Revenue Agency has introduced significant changes to trust reporting rules. The new rules apply to trusts with taxation years ending after December 30th, 2023. Specifically, all trusts—except where specific conditions are met—must now file an annual T3 return, along with additional beneficial ownership information (completed in Schedule 15 of the annual T3 return).
Notably, bare trusts are also now required to file an annual T3 return.
These new requirements are a major expansion of reporting obligations that could present compliance challenges for some taxpayers. This could be the first time that a trust is required to file, in which case it will need to first register for a trust account number before filing the T3 return. Failure to comply with the new rules could result in substantial penalties.
In some instances, where gross negligence in making a false statement or omission is proven by the CRA, a penalty equal to the greater of $2,500 and 5 per cent of the highest fair market value of all the property held by the trust at any time in the year could apply. Given the severity of the penalties, these compliance obligations should not be overlooked.
To complete Schedule 15, information on all reportable entities must be provided. Reportable entities, as defined in the T4013 T3 Trust Guide, include, but are not limited to, trustees, settlors, beneficiaries and other controlling persons who have the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust. It’s crucial to list all reportable entities on Schedule 15 for the trust, including anyone who became or ceased to be a reportable entity during the filing year.
Required information disclosures for reportable entities include the following:
- Legal name
- Date of birth (if applicable)
- Country of residence, and
- Tax Identification Number (i.e., Social Insurance Number, Business Number, Trust Number, or, in the case of a non-resident trust, the identification number assigned by a foreign jurisdiction)
Bare trust reporting
Prior to 2023, bare trusts had no obligation to file T3 Returns. However, under the new reporting requirements, bare trusts are also obligated to file T3 returns and to complete Schedule 15, unless they are classified as a listed trust. The definition of a listed trust in the Canadian Income Tax Act is extensive and includes, but is not limited to, trusts that have been in existence for less than three months at the end of the year; trusts holding assets with a total fair market value not exceeding $50,000 throughout the year; Graduated Rate Estates (GRE); Qualified Disability Trusts (QDT), and more.
In light of the uncertainty surrounding the new rules, the CRA is providing proactive penalty relief for the 2023 tax year to assist taxpayers in meeting their filing obligations under the new regime. Bare trusts that file by the April 2nd, 2024, deadline will not be subject to penalties. This relief will only apply for the 2023 tax year. As previously noted, penalties for failing to file due to gross negligence will be the greater of $2,500 and 5 per cent of the highest fair market value of all the property held by the trust at any time in the year.
A bare trust must also register for a trust number and include a trust document for the first year of filing. All income from the trust property should be reported on the beneficial owner’s income tax return. When naming a bare trust, the name from the trust deed should be used, if available. If no written agreement exists, the legal name of the beneficial owner(s) with a “Trust” at the end should be used. Names should be listed in alphabetical order for multiple owners.
For more information about the new trust reporting requirements, contact a member of the KRP LLP team today.
Max Khavkhanov, Senior Tax Specialist