This article appears in the first edition of the Private Wealth Newsletter 2024.

In more detail

Background

Initially introduced in the 2018 federal budget, the new rules aim to improve the collection of beneficial ownership information related to trusts and help the CRA assess the tax liability for trusts and their beneficiaries. These rules were originally planned to come into effect in 2021, but the implementation was ultimately deferred to taxation years ending after 30 December 2023.

Under the old rules, a trust generally was only required to file a T3 Return if the trust had tax payable, disposed of a capital property or distributed any of its income or capital to its beneficiaries.

A trust that had no activity during the year and no tax payable generally was not required to file a T3 Return. Bare trusts were not obliged to file a T3 Return. In addition, trusts that were required to file a T3 Return do not have to identify all of the trust’s beneficiaries.

The new rules

Starting from taxation years ending after 30 December 2023, the new rules require nonresident trusts that previously were required to file a T3 Return under the old rules and certain trusts that are resident in Canada, to file a T3 Return to provide additional information, including the name, address, date of birth (for individuals), jurisdiction of residence and taxpayer identification number (TIN) of the following:

• The settlor of the trust.
• Each of the trustees.
• Each of the beneficiaries.
• Anyone with the ability to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g., a protector).

The required information needs to be filed as a new schedule (Schedule 15 — Beneficial Ownership Information of a Trust) along with the T3 Return. It cannot be filed on its own.

Notably, the new rules are explicitly extended to bare trusts (i.e., trust arrangement where the trustee can reasonably be considered to act as agent for the beneficiaries).

The following trusts may be exempt from the new disclosure obligations:

• Mutual fund trusts, segregated funds and master trusts.
• Trusts where all the units are listed on a designated stock exchange.
• Trusts governed by registered plans (e.g., registered pension plans, registered retirement savings plans, tax-free savings accounts, etc.).
• Employee health and life trusts.
• Lawyers’ general trust accounts.
• Graduated rate estates and qualified disability trusts.
• Trusts that qualify as nonprofit organizations or registered charities.
• Trusts that have been in existence for less than three months.
• Trusts that hold less than CAD 50,000 in assets (limited to deposits, government debt obligations and listed securities) throughout the taxation year.

Failure to file the T3 Return including the new Schedule 15 would result in a penalty of CAD 25 per day of delinquency (with a minimum penalty of CAD 100 and maximum penalty of CAD 2,500). If such failure is made knowingly, or if there is gross negligence, an additional penalty of 5% of the maximum fair market value of the trust’s assets (with a minimum penalty of CAD 2,500) could be imposed. Existing penalties in relation to the T3 Return will continue to apply.

Bare trust

A bare trust refers to a trust arrangement where the trustee can reasonably be considered to act as agent for the beneficiaries of the trust in relation to all dealings with the trust's property. The trustee's only function is to hold the legal title of the property. The trustee has no significant power or responsibilities over the property and only acts on the beneficiaries' instructions. Examples of a bare trust include a nominee's legal title to real estate, funds held in escrow, accounts in trust (an account managed by the account holder for the beneficiary), etc.

For the 2023 tax year, bare trusts are not required to file the T3 Return and Schedule 15, unless directly requested by the CRA to do so. The CRA will further clarify its guidance on the new reporting requirements for bare trusts over the coming months.

Key message

Due to the new trust reporting and disclosure rules, trusts that had no reporting and disclosure obligations on the basis that they had no tax payable and no activity during the year could be caught under the new rules and required to file a T3 Return. Information not previously required would now have to be complied and disclosed. Trustees should work with their advisers to identify the trust arrangements that would be subject to the new reporting obligations and understand the scope of the new reporting requirements.