Trusts have long been integral to tax and estate planning, offering flexibility, control, and asset protection. In a move toward enhanced transparency and in alignment with international standards, the Government of Canada has introduced new reporting requirements for trusts.
These changes, effective for tax years ending after December 30, 2023, signify a commitment to upholding the integrity of the Canadian tax system and ensuring the disclosure of beneficial ownership information.
This blog post provides and overview of trusts, and the impact of the new reporting requirements for 2023.
Important dates to remember
The deadline for the T3 return, including the new Schedule 15, is 90 days after the trust's tax year end. Trusts with a December 31, 2023 tax year end will need to file their T3 Return by April 2, 2024. (The 90-day deadline is extended in 2024 due to holidays and weekends).
It is important to meet the filing deadline in order to avoid penalties. Trusts that previously did not need to file returns may need to file T3 returns for the first time for 2023. Also, late-filing may result in penalties, even if there is no tax owing for the trust.
Express trusts
The Canada Revenue Agency (CRA) states the following with respect to express trusts:
"An express trust is generally a trust created deliberately (with express intent), by a settlor, usually in writing. A settlor intends to set up a trust, transfers property to the trust, and identifies a beneficiary or beneficiaries. It is accepted at common law that an express trust cannot be established unless three certainties are present, namely the certainty of: - the intent to create a trust, - the property to be placed in trust, and - the identity of the beneficiaries of the trust."
One takeaway from this definition is that Express trusts are created deliberately, with legal paperwork involved.
Parties in a Trust
Settlor
Establishes the trust by contributing the initial property to the trust. The settlor can include specific conditions on how and when the assets are to be distributed. Once the trust is “settled”, the settlor’s role is complete.
Notably, the definition of a 'settlor' extends beyond the trust's creator to include non-arm’s length individuals involved in estate freezes, property transactions, loans, or expense payments on behalf of the trust.
The settlor isn’t usually a beneficiary of the trust. In some trusts, a settlor can also be a trustee.
Trustee
Manages the property held in the trust and distributes assets to beneficiaries according to the terms of the trust, including how, why, and when trust assets may be distributed to the beneficiaries.
Beneficiary
The beneficiary is the person(s) entitled to receive the trust’s property as determined by the terms of the trust and the applicable law. Beneficiaries can have different rights.
Example: Stephen sold a successful business for 1 million dollars. He has two young children, Carla (age 6) and Evander (Age 8). He wants to give his children $100,000 each when they finish university. Stephen decides to set up a trust and transfers $200,000 into the trust. He plans to manage the trust until his children complete university. Stephen is the settlor, because he contributed $200,000 into the trust. Stephen is also the trustee because he manages the trust. Carla and Evander are the beneficiaries of the trust.
Why Setup a Trust?
Setting up a trust can offer numerous benefits and serve as a strategic financial tool for individuals and families alike.
One compelling reason to establish a trust is asset protection. By placing assets into a trust, you can shield them from potential creditors or legal claims, providing a safeguard for your wealth.
Additionally, trusts can facilitate efficient estate planning, allowing for the smooth transfer of assets to beneficiaries while minimizing the complexities and expenses associated with probate.
Moreover, trusts offer privacy since they typically avoid the public probate process, maintaining confidentiality regarding the distribution of assets.
Furthermore, trusts can be instrumental in ensuring the care and financial support of loved ones, especially in cases involving minor children or individuals with special needs, by allowing you to dictate how and when assets are distributed.
Overall, setting up a trust can offer peace of mind, asset protection, and effective wealth management for you and your family's future.
Common Types of Trust Arrangements and Filing Requirements Under the New 2023 Enhanced Reporting Rules
The table below lists common types of trust arrangements that individuals may be involved with. It is only meant to illustrate and does not include all possible types of arrangements.
Common types of trust arrangements | |
Description of trust or arrangement | Is a 2023 T3 return including enhanced reporting of trustees, beneficiaries, settlors, and other persons with authority required? |
Family trust established to own shares of family business | Yes |
Family trust owning family cottage | Yes |
Spousal or common-law trust | Yes |
Alter-ego trust | Yes |
Testamentary trust that is a graduated rate estate | No |
Testamentary trust that is not a graduated rate estate | Yes |
Qualified disability trust | No |
Registered education savings plan | No |
Registered retirement savings account | No |
Tax-free savings account | No |
First home savings account | No |
Bare trusts
The term "bare trust" is not defined in the Income Tax Act. However, it is generally considered to be an arrangement under which a trust can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all of the trust 's property.
The CRA states that a trustee can reasonably be considered to act as an agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property.
In other words, a bare trust may exist when the legal owner (“owner on paper”) of a property does not match the beneficial owner (“true owner”).
Bare trusts may be formed informally, with no legal documentation. In fact, many people may not realize that they are a party to a Bare trust. Bare trusts are specifically included in the new trust reporting rules and will have to file for the first time for 2023 returns.
The application of the new reporting rules to bare trusts is significant. Bare trusts are commonly used in many types of personal and commercial arrangements, such as estate planning and real estate holdings, and can easily be overlooked because prior to the new reporting rules, tax filings for bare trusts were generally not required.
Example: David purchased a new house last year and did not qualify for a mortgage on his own. He asked his father, William, to co-sign on the mortgage. William was also added to the title of the property. Since William is on title for the property, he is included as a legal owner. David lives in the home as his primary residence. He makes all of the mortgage payments, and intends to claim the Principal Residence Exemption when he eventually sells the house. David is the sole beneficial owner of the property. Since there is a mis-match between legal and beneficial owners, there is a Bare trust formed.
Exempted Trusts from the New Reporting Requirements
Some trusts are exempt from the new reporting requirements, like registered plans and qualified disability trusts. Exemptions are based on type of assets held, total value of assets, or date of creation of the trust.
The legislation provides that a trust in existence for less than three months as of December 31, 2023, will not need to file for 2023. In addition, where the maximum value of the assets is no more than $50,000 (CAD) at any time in the year and where such assets are comprised only of money and certain exempt marketable securities throughout the year, no trust filing will be required.
It is important to seek legal advice to confirm that a trust qualifies for an exemption.
Penalties
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.
Ensuring Compliance
As we traverse this evolving landscape of trust reporting, it is essential to recognize the expanded scope and implications affecting the type of trusts, notably, those that were previously exempt. Diligence in compiling the required information within the specified timelines will be key to compliance. The changes underscore Canada's commitment to transparency, reinforcing trust in the tax system's effectiveness and integrity.
If you have further questions or need personalized assistance regarding these changes, contact us to schedule a consultation.
Clearly Financials is here to address any questions or concerns you may have regarding these new trust reporting requirements. Our team is committed to providing the guidance and support needed to navigate these changes successfully.
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Disclaimer
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.