Recent amendments to Canada’s tax laws will require many Canadians to file a trust tax return for the 2023, even where they might not know that a trust exists. In this newsletter we will describe many common arrangements used by Canadians that now result in a requirement to file an annual T3 trust tax return for the 2023 and later tax years. 

In addition, many people who already file a T3 trust tax return will need to disclose much more information for 2023 than was required in prior years. This will require a proactive effort to gather that information before March of 2024. 

We recommend that you read this entire newsletter to determine if you have a new trust return filing, or a new information disclosure requirement in your existing trust return and contact us as soon as possible if you think you have a new filing requirement. There may be substantial amounts of information for you to gather and to provide to us so that we can prepare the trust return for the 2023 year before the March 30, 2024 filing deadline. 

Bare Trusts

Generally speaking, a “bare trust” is a relationship where one person (the agent) holds property in their name, but the other person (the beneficial owner) actually controls the property and has all of the rights and obligations related to the property. 

Prior to 2023, a rule in the tax legislation said that such a bare trust arrangement does not exist as a separate person for tax purposes, which means that such bare trust had no tax return filing requirements. This rule was quite logical because all of the bare trust’s activity is recorded by the beneficial owners of the property under the bare trust, so there was no income or expense to report by the bare trust. 

However, a new rule for 2023 provides that while a bare trust does still not exist for every purpose other than the tax filing requirement, a bare trust now exists as a separate person just for the tax filing requirements. For all other purposes of the tax legislation, a bare trust does not exist, and the beneficial owners report all the income and activity on their tax returns. The result of this change is that a bare trust arrangement that does not exist for tax purposes is now deemed to exist just so that it can be required to file a tax return. 

An example of a bare trust where many people will not know they have a bare trust is where a person adds their adult child’s name to their bank account or their investment account so their adult child can help them manage the account, pay bills, or make investments. For example:

• Mary had her 75^th birthday this year and she is spending more time travelling outside Canada which makes it harder for her to manage her bank accounts and investment accounts when she travels.
• Mary adds the name of her adult daughter, Elaine, to her bank accounts and investment accounts. This allows Elaine to deal with the bank on behalf of her mother to make payments, deposit or withdraw funds, and manage investments, because Elaine is now named as one of the owners of the account. 
• Mary has not actually given any of the funds in her bank account or investment account to Elaine: 
  • All the funds in these accounts still belong to Mary, even though the account statements show Mary and Elaine as equal owners of the account. 
  • All the interest, dividends, and other income from these funds belongs to Mary and is reported on Mary’s tax return. None of the income belongs to Elaine and none of the income is reported on Elaine’s tax return. 
• In this case, Elaine is the agent for her mother Mary under a bare trust. 

For income tax purposes under the new rules, Elaine must now file a trust return to report the bare trust to Canada Revenue Agency. If Elaine fails to file a trust return for the 2023 year (or any subsequent year), she may be assessed a penalty of $2,500 per failure to file or, in certain circumstances, the much bigger “gross negligence” penalty (see below for details). This penalty will apply even if both Mary and Elaine file their personal tax returns on time and accurately report and pay tax on all their income in those personal tax returns. 

Another common example of a bare trust (especially in British Columbia) is the use of a nominee corporation to hold legal title to real estate. Many commercial real estate properties have an ownership structure where legal title to the property is registered in the name of a nominee corporation, but the actual beneficial owners of the property are other people or partnerships. Such arrangements will now have a T3 trust filing return requirement and will be penalized for failing to file the trust return even though the ownership of the property, and all the income from the property, is accurately reported on the tax return of the beneficial owner(s). 

An example of a bare trust arrangement that might not be obvious is the ownership of a family home or vacation property in circumstances where the land title registration details do not match the beneficial ownership. Consider the following example:

• John owns his own home, and he started a long-term relationship with Susan last year. 
• Susan has recently sold her own home and moved in with John as their relationship has progressed. Susan took the proceeds of selling her home and “bought” half of John’s home by giving John the funds to pay off his remaining mortgage on their home. 
• If John sells the home, he will share half the sale proceeds with Susan because under their agreement she now owns half their home. Susan is now responsible with John for expenses like property taxes and insurance because she owns half their home.
• They don’t register Susan’s name on the land title registration with the Land Title Office as that is too complicated without hiring a lawyer. 
• John now holds half the legal title to their home in a bare trust for Susan.

For income tax purposes, John must file a trust return to report the bare trust. If John fails to file a trust return for the 2023 year (or any subsequent year), he may be assessed penalties for failure to file his trust return every year even though there is no income or capital gain from the home to be reported for the year. 

Yet another common example of a bare trust is a lawyer’s trust account. A lawyer’s general trust account is exempt from the bare trust filing requirements, but a specific lawyer’s trust account is not exempt. Consider the following example:

• Amber has entered into a contract to purchase a commercial strata unit for her business, but the closing date is more than six months away. 
• Amber has paid a $100,000 deposit into trust for the purchase of the property. Instead of leaving the funds in a non-interest-bearing general lawyer’s trust account, she has instructed her lawyer to hold the deposit in an interest-bearing account, which requires her lawyer to hold the funds in a specific trust account. The lawyer will issue a T5 slip to Amber and to CRA to report the interest earned by Amber on the deposit. 
• Amber’s lawyer is now required to file a separate trust income tax return for the specific trust account (and a separate trust income tax return for each other client that has a specific trust account), even though the interest earned by Amber is already reported to CRA on the T5 slip. 
• The cost of preparing the additional tax return will be borne by Amber. 

If Amber’s lawyer fails to file a trust return for each year where the specific trust account is maintained, they may be assessed penalties for failure to file the trust return every year even though the interest income from the trust is already reported to CRA on the T5 slip. This increase Amber’s legal fees on the transaction. 

D&H Group LLP Observation:

On December 1, 2023 the Canada Revenue Agency published new guidance on the new trust reporting requirements. In that guidance, the CRA announced that they would waive the regular late-filing penalty for bare trusts that do not file their 2023 year tax return on time. However, such bare trusts are still required to file a return, an CRA specifically noted that they would not waive the gross negligence penalty where a failure to file a bare trust return was made knowingly. 

While this announcement is welcome, it really does nothing to solve the problem created by the new rules that require an extra tax return to be filed where no income is earned and no tax is payable by the bare trust. 

We hope that this announcement is not the last administrative concession by CRA on this matter, and that this announcement was made to allow CRA to consider creating additional administrative exemptions from the filing requirements, especially in situations such as the examples described above. 

New Filing Requirements for Express Trusts

An “express trust” is a relationship between a trustee who controls property for the beneficiaries of a trust. Express trusts are created with the settlor’s express written or verbal intent (in contrast with other trusts that result by operation of law). 

Under the rules in place for many years, an express trust must file a trust tax return every year unless the trust had very little or no activity for the year.

For 2023, an express trust must file a T3 return for a tax year unless it meets any of the exemptions from the new requirements. There are exemptions from the new disclosure requirements for trusts that:

• Have been in existence for less than three months at the end of the year;
• Hold no property other than bank deposits, government debt obligations, and listed securities (note that shares of a private corporation are not one of the permitted properties), and those assets have a total fair market value that does not exceed $50,000 throughout the entire year;
• Qualify as a non-profit organization that is a club, society or association described in paragraph 149(1)(l) of the Income Tax Act or is a registered charity; 
• Have all of their units listed on a designated stock exchange (such as a real estate investment trust or “REIT”);
• Are a mutual fund trust or master trust or is a segregated fund; 
• Are a “graduated rate estate” (generally speaking, a GRE is an estate where less than 36 months has passed since the death of the person that created the estate);
• Are a “qualified disability trust”;
• Are an “employee life and health trust”;
• Are under or governed by a deferred profit-sharing plan, employee profit sharing plan, first home savings account, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered supplementary unemployment benefit plan, registered pension plan, registered retirement income fund or registered retirement savings plan.
• Are a lawyer’s general trust account. Note that where a lawyer has a separate trust account for a client, that account is not exempt from the filing requirement and a separate T3 trust tax return is required for each such separate lawyer’s trust account. This tax return filing requirement will add to the annual cost of maintaining a separate trust account. 

However, a trust that qualifies for any these exemptions must file a T3 return if any one of several criteria was met, including:

• The trust had tax payable for year;
• The trust was resident in Canada for tax purposes and had disposed of (or was deemed to have disposed of) a capital property or had realized a taxable capital gain; or
• The trust was a deemed resident trust.

New Disclosure Requirements for Express Trusts

For 2023, trusts subject to the new information reporting requirements must report:

i: The name, address, date of birth (in the case of an indvidual other than a trust), jurisdiction of resident for income tax purposes, and taxpayer identification number (Social Insurance Number, Business Number, etc.) in respect of each of the following persons:

• trustees, beneficiaries, and settlors of the trust
• any person who may, under the trust terms or a related agreement, exert influence over trustee decisions regarding the allocation of trust income or capital in a year (e.g. a ”protector” of the trust).

ii: Information about any beneficiaries that cannot be listed by name (for example, unborn children and grandchildren) because these beneficiaries are unknown at the time of filing the trust’s tax return.

A new beneficial ownership schedule, T3 Schedule 15, Beneficial Ownership Information of a Trust, must be filed with the T3 return to report the required information. If you have a trust that we have assisted you with the T3 filings in the past, you will have already received a letter from us asking you to fill out the new information and return it to us. 

D&H Group LLP Observation:

A trustee must make a good faith effort to obtain the information. If the information cannot be obtained (perhaps because a beneficiary cannot be located, or because a beneficiary refuses to provide some or all of the information) then a trustee should retain proof of that good faith effort to obtain the information (such as written requests for the information, or efforts to find a beneficiary who cannot be located). 

Most of the new information required to be gathered by trustees and retained in the trust’s records is highly sensitive – this information is what could be used to commit fraud or identity theft, or to gain unauthorised access to bank or investment accounts. The information should be securely held by trustees and should only be transmitted in a secure manner (such as electronic transmission using encryption or a secure email system). Trustees holding this information should evaluate their systems of retaining information and documents to ensure that they maintain the appropriate level of security. 

Exemption for Internal Trusts of a Registered Charity

Some charities use “internal trusts” to carry out some of their activities. While these trusts meet the threshold for the new reporting rules, the Canada Revenue Agency recently announced an administrative exemption from the new reporting requirements to express internal trusts held by registered charities. 

A registered charity is not required to file a T3 return for these trusts. An internal trust is created when a registered charity:

• Receives property as a gift that is subject to certain legally enforceable terms and conditions; and
• Holds that property as the trustee of the trust.

This administrative exemption only applies to registered charities and not to internal trusts created by other not-for-profit entities. 

Penalties for Failure to File Trust Tax Return or Omission of Information from a Return filed

Under the existing rules, the penalty for not filing a T3 return or for omitting required information with the return, is $25 for each day late, with a minimum penalty of $100 and a maximum penalty of $2,500. The penalty is subject to interest charges from the filing due date until the penalty is paid. 

The new rules also impose substantial additional “gross negligence” penalties where a failure to file was made knowingly or due to gross negligence. The additional penalty is 5% of the maximum fair market value of property held by the trust during the relevant year, with a minimum penalty of $2,500. This penalty also applies to false statements and omissions amounting to gross negligence, as well as a failure to respond to a Canada Revenue Agency demand to file a T3 return. 

More Information from the Government of Canada

For more information, please see the federal government’s news releases:

• https://www.canada.ca/en/revenue-agency/news/newsroom/tax-tips/tax-tips-2023/new-reporting-requirements-trusts-as-december-31-2023.html
• https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/budget-2018-equality-growth-strong-middle-class/reporting-requirements-trusts.html
• https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html

Raise Your Concerns with Your Member of Parliament

We are deeply concerned about the scope and application of the new rules, and in particular the application of the new rules to bare trusts. The new filing rules for bare trusts will require hundreds or thousands of our clients to file a trust tax return even where all of the income and activity is already reported on the tax return of the beneficial owners of the property and the trust has no tax liability. Some of these ownership arrangements are already subject to disclosure under the B.C. Landowner Transparency Register (see https://landtransparency.ca/) and the filing of a bare trust return will add redundant layer of disclosure. 

We are also deeply concerned that the new information reporting requirements because they require trustees to gather and retain substantial amounts of sensitive information. This creates a risk of fraud and identity theft and may require trustees to incur added costs to secure the information. 

We have raised our concerns with our Member of Parliament, including our concerns about the large number of bare trusts that will be required to file a new tax return even though the income and assets are already reported on the tax returns of the beneficial owner. 

If you wish to express your concerns to your member of Parliament, you can find your M.P.’s contact information here: https://www.ourcommons.ca/members/en

Please contact your D&H Group LLP advisor if you have any questions. 

News