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Important New Tax Rule You Probably Don't Know About

Updated: Apr 6

The trust agreement you didn't know you'd entered into

Please note that, at the eleventh hour, CRA decided not to require bare trusts to file a return for 2023. Hoever, their news release had very little detail, so be prepared to revisit this for 2024.

Starting this year, there are new reporting requirements for trusts. If you're thinking, "Well, that doesn't apply to me," please keep reading because certain types of trusts include common situations that many people are in. The new rules come with hefty penalties for noncompliance, so this isn't something to ignore.

What is a trust, anyway?

A trust is really just a method of transferring property from one person (the settlor) to another person (the trustee) for the benefit of a third person (the beneficiary). The fairy tale example is the long-lost rich relative (the settlor) who dies and leaves all their money to your teenage self (the beneficiary). But since you're a teenager and your rich relative didn't trust your financial judgment, they left your inheritance in control of your evil step-parent (the trustee) until you're 25. And then some shenanigans and romance happen.

There are lots of different kinds of trusts. Sometimes the settlor and the trustee are the same person. Sometimes the people aren't people, but instead are corporations or other organizations. Sometimes there's a legal trust agreement and other times there's a verbal understanding. The property held in trust could be money, some sort of investment, land, or other physical assets. There could be multiple settlors, trustees, and beneficiaries, and sometimes it's not obvious who's included. The main thing is, a trust often doesn't look like the fairy tale example we're all familiar with.

Okay, so I'm not a character in a fairy tale. Give me some real-life examples.

Here are a few common situations where the trustee may now need to file a T3:

  • someone has their name on a bank account or investment account that belongs to someone else (like a child or elderly or disabled relative)

  • someone is registered on title of a property that wouldn't be considered theirs (like being on title of a child's or parent's home for estate planning or other reasons)

  • one person in a business partnership holds the title to property used by all the business partners

  • grandma's vacation property is held in a testamentary trust after she dies so the whole family can use it

The first two examples especially will have caught the attention of a lot of people. Luckily there is an exemption for bank accounts that hold cash deposits that never got above $50,000 in the year. So if you've got your name on your mother's chequing account so you can help with her day to day banking, you're probably not going to be affected.

For many people, these new rules won't have any tax consequences, meaning you won't owe the government any money. The rules are meant to help the government detect financial crime like tax evasion and money laundering and to bring Canada's rules into line with other countries that we cooperate with. Even though there are no tax consequences, you still need to file a return.

New requirements

Trustees are responsible for filing what's called a T3 tax return (individuals file a T1 return and corporations file a T2). In the past, many trusts were exempt from filing for various reasons or they only had to file in certain situations, like when the trust had income and needed to pay tax on it. With the new rules, many of those trusts that used to be exempt are now required to file a return every year. One of the big changes that will affect many people has to do with bare trusts and informal trust arrangements. These types of trusts were pretty much ignored for tax purposes in the past, but are now included in the list of trusts that need to file annual T3s. Having your name on someone else's bank account or property title would be considered a bare trust.

On the T3 return, a new form called the Schedule 15 will need to be filled out. This form requires information about all the settlors, trustees, and beneficiaries of the trust, including name, address, date of birth, and taxpayer ID number. For most Canadian individuals, the taxpayer ID would be a social insurance number, but it could also be something else, like a business number. This is supposed to be an exhaustive list. They even want unnamed beneficiaries (like unborn children) listed! In some situations, your legal advisor will have to help you make sure all the relationships have been accounted for.

What happens if you don't file or if you file late - serious consequences!

If a T3 is not filed or if it's filed but information is withheld, CRA can charge penalties of a minimum of $2,500 or up to 5% of the fair market value of the property held in the trust. If the return is filed late, the penalty is $25 per day, with a minimum penalty of $100 and a maximum of $2,500. Those penalties are for trusts that are filing only for the new reporting requirements. If a trust has income, the penalties are different.

The filing deadline for trusts is 90 days after the end of the year, so for most trusts that means March 31st (or the 30th if it's a leap year.) This year, because of the Easter holiday, the deadline is April 2, 2024.

Exemptions to the filing requirements

There are quite a few exemptions, like the one mentioned above for bank accounts with less than $50,000. Canada Revenue has a lot of them here, in section 2.3. What is a listed trust?

Many people will be glad to hear there are exemptions for:

  • trusts created after September, 2023 (exempt from this year's filing only - not forever)

  • a graduated rate estate (this will be of interest for anyone acting as executor of an estate)

  • a qualified disability trust

  • trusts under or governed by a registered plan (like a Registered Educations Savings Plan (RESP), Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA))

So what do I have to do?

If you think you might be in one of these trust situations and you already have a legal advisor, start by asking them for their opinion. Since CRA wants detailed information of everyone involved in the trust, you may need to spend some time tracking down everything you need. As noted above, there are many different types of trusts and there can be a lot of people involved. In order to file your return, you will need to provide us with the information required on the Schedule 15 - identifying information for all the people involved in the trust. If there are trust agreement documents, we will also require copies of those. If there is no written agreement, we can write an explanatory letter to CRA for you.

Please realize that we can file the T3 tax return for you and give you some guidance on the trust rules, but we are not legal experts. We might not always be able to determine whether or not the situation you're in qualifies as a trust or who all the people involved are. Those are legal determinations. However, we're always happy to take your questions!


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