New trust reporting requirements for T3 returns

New filing requirements

For trusts with taxation years ending after December 30, 2023, all non-resident trusts that currently have to file a T3 return and express trusts that are resident in Canada, with some exceptions (listed trusts), will have to provide additional information on an annual basis. [ITR 204.2(1) & 204.2(2)]. Bare trusts will also be subject to these new filing requirements.  As a result, for the 2023 and subsequent taxation years, certain trusts will have to file a T3 return where currently they do not have to file a T3 return.

The intent of the federal government with this measure is to access detailed information of the actors within beneficial ownership arrangements that in many instances could be hidden due to the nature of these arrangements. Beneficial ownership includes ownership through any trustee, legal representative, agent or mandatary, or other intermediary [CBCA 2].

Usually in these arrangements, the beneficial owner would control the administration of the assets held legally by intermediaries (for trusts they would be trustees) on their behalf, and collect income generated by those assets.

A new schedule has been added to the T3 tax return, Schedule 15 , to indicate the required information for the new reporting requirements (see next section). This schedule must be included with the T3 return.

Information required on Schedule 15

The subject trusts will have to report the identity of all trustees, beneficiaries and settlors of the trust, along with each person who has the ability (through the trust terms or a related agreement) to exert control or override trustee decisions over the appointment of income or capital [ITR 204.2(1)].

The required information is:

·        name;

·        address;

·        date of birth;

·        country of residence; and

·        tax identification number (such as the SIN, business number, or trust account number).

The beneficial ownership information should only be captured if it is the first time the trust is reporting the information or if the beneficial ownership has changed during the tax year. For the CRA, previously reported entities will be automatically carried forward.

If the information required is not available at the time of filing, for example, unborn children and grandchildren, their spouses, information must be provided that details the terms of the trust that extend the class of beneficiaries to unknown entities.

Express trusts defined

An express trust is a trust created with the settlor's express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provision of a statute).

Bare trusts defined

Bare trusts are not defined in the Income Tax Act. Based on jurisprudence, these trusts are defined as “bare”, “naked” or “simple” trusts where the trustees hold property legally on behalf of beneficiaries. However, the effective or beneficial ownership of the property resides with the beneficiary [De Mond vs R]. In this type of trust, the trustee has no independent or discretionary powers to administer the assets held by the trust; his/her only responsibility is to carry out the instructions of the beneficiary, who is the beneficial owner of the assets [De Mond vs Queen].

Bare trusts can exist without any trust document that creates the trust. It is the relationship between the trustee and the beneficial owner that confirms the existence [De Mond vs Queen].

The administrative policy of the CRA is to ignore bare trusts for income tax purposes, and instead consider the beneficial owners as the owners of the assets/properties held within the trust [De Mond v Queen, ITTN-7]. Consequently, the beneficial owners will be taxed on the income generated by the assets/properties held legally by the bare trust.

Common examples of bare trusts on an individual level are:

·        Co-ownership of real estate property: Parent adds their name to the legal ownership of property allowing child to purchase and live in the property.

·        Joint bank accounts: Child added to the bank account in order to help elderly parent with their day-to-day finances.

·        Bank accounts of minor children: parent opening and administering a bank account for their minor child.

Common examples of bare trusts in a business setting are:

·        Real estate property: Corporation holds the legal title of a property, but individual shareholder is the beneficial owner. This setup occurs when the individual shareholder wants to keep anonymity, protect the property from creditors in a bankruptcy setting, and avoid paying transfer taxes when the property is being sold to third party (shares of the corporation, who owns the property, are sold instead of the property itself, therefore legal owner never changes).

·        Real estate property: Individual shareholder holds the legal title of a property, but the corporation is the beneficial owner. This setup occurs when banks would be hesitant to provide a mortgage loan to a corporation for the purchase of a property to be used by the corporation.

·        Personal use of business vehicle: Company-owned vehicle that the employee/shareholder uses for personal use.

·        Joint ventures: two or more persons agree to contribute goods, services, or capital to a common commercial enterprise, while retaining ownership of the property contributed.

Trusts required to file T3 return

All trusts, including listed trusts, are required to file a T3 return if [ITA 150(1)(c)]:

·        tax is payable for the year,

·        where the trust is resident in Canada at any time in the year, the trust has a taxable capital gain or disposes of capital property in the year,

·        where the trust is non-resident throughout the year, the trust has a taxable capital gain (otherwise than from an excluded disposition) or disposes of a taxable Canadian property (otherwise than in an excluded disposition) in the year.

A trust is also required to file a tax return if [T4013]:

·        is a deemed resident trust,

·        holds property that is subject to subsection 75(2) of the Act,

·        has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary's use, or

·        receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:

o   total income from all sources of more than $500

o   income of more than $100 allocated to any single beneficiary

o   made a distribution of capital to one or more beneficiaries

o   allocated any portion of the income to a non-resident beneficiary.

Trusts exempt from new filing requirements

Trusts exempted from the new filing requirements of producing Schedule 15, called listed trusts, are [ITR 204.2(1) & ITA 150(1.2)(a) to (o)]:

·        mutual fund trusts, segregated funds and master trusts;

·        trusts governed by registered plans (i.e., deferred profit-sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts);

·        lawyers' general trust accounts;

·        graduated rate estates and qualified disability trusts;

·        trusts that qualify as non-profit organizations or registered charities;

·        trusts that have been in existence for less than three months; and

·        trusts that hold less than $50,000 in assets* throughout the taxation year (provided that their holdings are confined to deposits, government debt obligations, mutual funds, listed securities).

*Assets such as physical gold and silver (coins/bars) are not included in this exemption.

Listed trusts are not required to file Schedule 15. However, they might be required to produce a T3 return (see previous section).