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New tax legislation requires increased tax reporting for existing trusts and will create filing requirements for other trusts which are express trusts and bare trusts (even those without formal legal agreements). Many trusts will be filing for the first time.
The purpose of this legislation is to increase transparency of beneficial ownership of trust assets and provide more details to the government regarding the parties who created and control these trusts.
If you are uncertain whether or not your particular situation constitutes a trust or bare trust for purposes of this new reporting, please consult your lawyer.
What is an express trust?
An express trust is generally a trust created with the settlor’s express intent, usually made in writing. Not all express trusts will have a formal written agreement. It is a question of fact whether a trust has been created absent a formal written agreement. Bare trusts or other arrangements where a trustee is acting as agent for the beneficiaries are also considered express trusts for reporting purposes.
What is a bare trust?
You may not even be aware you are a party to a bare trust and may now have reporting requirements.
It is generally where legal title of the trust property is held by the trustee, but the beneficiary has beneficial ownership.
A bare trust is not defined in the Income Tax Act. Canada Revenue Agency states that a bare trust is generally an arrangement where:
A trustee can reasonably be considered to act as 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 order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.
Bare trusts are commonly used for the following purposes:
A filing is required for a bare trust arrangement, even absent a formal written agreement.
Exemptions for other trusts
Canada Revenue Agency lists the following exemptions from the new reporting requirements:
This includes the original property used to settle the trust. Trusts with other assets will not be eligible for exemption. (Note gold/silver coin is not an exempted asset, nor are dividends receivable which may exist for any volume of investments held);
Note 1: Canada Revenue Agency has stated at STEP roundtable that dividends receivable re not part of these exempted assets. This does appear to catch investment accounts that have dividend producing assets, resulting in a required filing.
Filing and reporting required
The trustee is required to obtain a T3 Trust Number and file a Trust Income Tax and Benefit Return, including new Schedule 15, to report the identity and other information for all parties considered to have control and beneficial ownership in the Trust. These parties include the settlor, trustee or bare trustee, beneficiaries and contingent or unknown beneficiaries. Parties must be reported regardless of entity type or country of residence. This reporting is made by completing new Schedule 15 to the Trust Income Tax and Benefit Return.
These new tax filing and reporting requirements are applicable to tax years ending on or after December 31, 2023 and will require a tax filing ahead of the deadline of March 30, 2024 to avoid significant penalties.
Penalties for non – compliance are significant.
Penalties start at $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500. Additional penalties of $2,500 minimum to a maximum of 5% of the trust’s highest asset fair market value apply if the failure was made knowingly or under gross negligence. For trusts with assets such as a house, vacation property or large investment portfolio, penalties for non-compliance are significant.
Further, if multiple parties are required to file, penalties will apply to each party for a single trust.
Although the filing deadline has not been extended, the government is waiving late filing penalties for trusts considered to be bare trusts for the 2023 year. All other types of trusts must still file before the March 30, 2024 deadline to avoid significant penalties.
How we can help
If you are aware that you have, or may have, a trust or trust like arrangement in existence that we do not presently file a tax return for:
Questions posed on the form or emailed to our office may not be addressed immediately due to the large volume of work involved as a result of this new legislation.
For existing trusts for which our office prepares an annual tax return and for which the changes are applicable, we have already contacted the trustee to obtain necessary information for the additional reporting.
Fees for services
Fees at our standard hourly rates will apply for our services including, but not limited to: Obtaining a T3 Trust Number, first year file set up and completion and filing of the T3 Trust Income Tax and Benefit Return including key party reporting requirements.
The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.
The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.
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