Recent changes in Canadian trust reporting rules now require a T3 Trust return for common financial arrangements, including shared property titles. These rules, aimed at increasing transparency, mean that many trusts previously exempt from filing must now do so within 90 days.
It is crucial to acknowledge the potential reality that a trust may exist within your financial arrangements. This includes a closer look at 'bare trusts,' a type of trust arrangement that may be more common in your financial activities than you realize.
"You might have a trust without even realizing it."
Let us ask you a few questions to determine if you might be involved in a trust arrangement:
Have you set up an in-trust bank account for a child or grandchild?
When you purchased your home, did one of your parents get added to the title of your home to help you with financing?
When performing estate planning, did you add one of your children as an owner of one of your assets or bank accounts?
What is a Trust in Canada (Excluding Quebec)?
A trust in Canada, excluding Quebec, is a legal mechanism where one person, known as the settlor, entrusts another person, called the trustee, to manage assets on behalf of a third party, the beneficiary.
One key area under these new rules is bare trusts, which are often overlooked yet commonplace.
What are Bare Trusts?
Even if the term sounds unfamiliar, it might be hiding in your financial situation. Bare trusts occur when the legal title of an asset is held by one person, but the actual benefit of the asset belongs to another.
They're now under the microscope of the new reporting rules, and the implications are significant. Bare trusts, frequently encountered in personal and commercial contexts, may easily escape attention since not everyone is aware that tax filings for them are required under the new rules.
E.g. Parents go on the title for their son for financing purposes because the son did not qualify for the mortgage. The parents are included as legal owners of the house. However, the son is the only beneficial owner. This is a bare trust arrangement
Previously overlooked, bare trusts are now subject to new reporting requirements, bringing a significant shift in compliance obligations. Bare trust arrangements are commonplace and historically, many did not have reporting requirements. Many Canadians will be surprised by their new filing obligations and could face stiff penalties from the CRA for non-compliance.
What are Express Trusts?
Another form of trust is an Express Trust, which the The Canada Revenue Agency (CRA) describes as “generally a trust created deliberately (with express intent).”
Many trusts will be filing a T3 return for the first time. Before the introduction of the new reporting requirements, a trust that did not earn income, dispose of capital property, or make distributions of income or capital in a year was generally not required to file an annual return.
Trustees must use Schedule 15 to report names, addresses and tax information numbers for beneficiaries.
While certain trusts are exempt from the new reporting requirements, conditions apply.
Trusts in existence for less than three months as of December 31, 2023, are exempt for the 2023 tax year.
Trusts with a maximum asset value not exceeding $50,000 (CAD) throughout the year, comprised solely of money and specific exempt marketable securities, are exempt from filing.
The deadline for the T3 return and Schedule 15 is 90 days after the trust's tax year end. The tax year end for most trusts, including bare trusts, is the end of the calendar year, December 31.
Trusts with a December 31, 2023, tax year end will need to file their T3 Return and Schedule 15 by April 2, 2024.
New penalties apply to those failing to adhere to the reporting requirements. These penalties are equal to the greater of $2,500 or 5% of the highest total fair market value of all property held by the trust in the year. This penalty also applies if a false statement or omission is knowingly made in the return or made under circumstances amounting to gross negligence.
Compliance is Key
As we manage the new trust reporting rules, it's time to step up and recognize the changes—especially for trusts that were previously exempt.
Be diligent, gather the necessary info, and let's ensure you're on the right side of compliance. We are here to guide you through it.
Should you require further clarification or personalized assistance regarding these changes, we invite you to contact us for a consultation. Clearly Financials provides the guidance and support needed to navigate these regulatory changes successfully.
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The information provided in this blog post is a simplified overview of complex matters and may not cover all the nuances of your particular accounting or tax situation. The content is intended for general educational purposes only and should not be taken as legal or financial advice. We strongly recommend consulting with a qualified professional before making any financial decisions based on the information provided. Please note that tax laws and regulations can change frequently, and we cannot guarantee the accuracy or completeness of the information provided in this post.