Keeping Up with Trust Reporting: New 2023 Trust Reporting Rules to the CRA
This article was originally published September 21, 2021 and has been updated to align with the new coming into force date set out in Bill C-32 (Fall Economic Statement Implementation Act, 2022). Under the revised legislation, the implementation of these trust reporting rules is delayed one year.
There are new tax return filing and information reporting requirements for trusts effective for taxation years ending on/after December 31, 2023. Changes include:
- Requiring a T3 to be filed for certain trusts even if they did not have to before;
- Requiring bare trusts to file a T3, which was not previously required; and,
- Requiring reporting of personal information including names of all trustees, beneficiaries, protectors and settlors and their addresses, date of birth and SIN
Summary of the changes
What are the new filing requirements?
The new rules are meant to provide transparency by collecting beneficial ownership information to allow the CRA to assess tax liabilities for trusts and their beneficiaries. Generally, a trust that has no activity during the year (or no income tax payable) is not required to file a T3 return; towever, these exemptions will no longer apply for certain Canadian-resident and non-resident trusts.
Many trustees may never have filed a T3 return. The 2023 taxation year may be the first time they have to file and provide the trust deed and ownership details of private company shares. The new filing requirements are onerous, and trustees should plan ahead. This may include gathering the additional information needed or terminating the trust if it is no longer needed before December 31, 2022.
As a planning measure, consider:
- Reviewing who is a beneficiary; or,
- Terminating the trust if it’ s no longer needed, or if it’s close to its 21st anniversary, before December 31, 2022
Personal information is required for each beneficiary. If the beneficiary class is too broad or remote, then there are more beneficiaries to contact for personal information. If those beneficiaries will be unlikely to receive any distributions from the trust, then consider whether they should remain as beneficiaries to avoid potential difficulties soliciting their information.
What are the new information reporting requirements?
These new reporting rules will require “express trusts” and non-resident trusts to report with its T3 return, the following information: name, address, date of birth, the jurisdiction of residence, and taxpayer identification number (TIN). This requirement applies to each settlor, trustee, beneficiary, and the person who can exert influence over trustee decisions regarding the appointment of income or capital of the trust in the year. This new schedule must be filed together with a T3 return.
What are the new requirements for Bare Trusts?
Reporting requirements will be imposed on bare trusts. A bare trust includes an arrangement where the trust acts as an agent for all the beneficiaries in dealing with the Trust’s property. Bare trusts are commonly used in real estate, but they can also be used in other situations. It is incumbent on the Trust to determine if it has a reporting requirement.
What are the exceptions to these new rules?
The following trusts may continue to be exempt from these new rules if certain conditions are met (no income tax payable, no taxable capital gains, no dispositions of capital property in the year):
- Graduated rate estates;
- Trusts that have existed for less than three months and hold assets with a total fair market value (FMV) of less than $50,000 throughout the year if the only assets are cash/deposits, government debt obligations and listed securities (other assets held even briefly may taint this);
- Mutual fund trusts, segregated funds and master trusts;
- Trusts governed by registered plans;
- Employee life and health trusts;
- Cemetery care trusts and trusts governed by eligible funeral arrangements;
- Lawyers’ general trust accounts;
- Qualified disability trusts; and,
- Trusts qualifying as non-profit organizations or registered charities
What are the penalties for non-compliance?
Penalties for failure to file the T3 return and including the new information reporting schedule will be $25 per day up to a maximum penalty of $2,500. Gross negligence penalties of up to 5% of the maximum fair market value of the property held in the trust in the year (minimum penalty of $2,500) may also apply.
Impact of these changes on other disclosure rules
FATCA and CRS requirements
Similar income-tax disclosure rules exist under the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS) in Canada’s Income Tax Act:
- FATCA – financial institutions are required to obtain certifications from most account holders to identify associated US persons. For Canadian entities classified as “passive non-financial entities”, the trust is required to provide detailed information on any settlor, grantor, trustee, beneficiaries and others exercising ownership or control of the trust, if any of these are US persons.
- CRS – information must be provided for certain account holders (including most family trusts) to provide the same information about trustees, grantors, settlors, beneficiaries and any controlling persons related to the trust.
It’s likely a trust has already been asked to complete a certification related to a bank account, brokerage account or other investment relationship. The difference between the disclosures mandated under FATCA and CRS and the new reporting rules is the absence of a selection mechanism for the information provided to the CRA – the information is only provided to the CRA where controlling persons identified by the trust are US persons or other non-Canadian persons. The new reporting requirements provide the CRA with a direct source of information to assist them in verifying consistency between the information reported under FATCA and CRS against the information reported with T3 returns. In anticipation of the new rules, trustees should review their submissions to various authorities for discrepancies.
These new rules place a heavier burden on trustees to gather and report information. It may take additional time to gather the information from the various parties, particularly in cases where a trust has not been filed in the past.
Consider whether it makes sense to make changes or dissolve the trust before December 31, 2022 to limit or avoid these additional reporting requirements.
We have the expertise to help you navigate these new requirements. Contact your DMCL advisor today to better understand how the new reporting rules will affect your trust before making any changes.