Enhanced Trust Reporting Requirements in Effect
As part of the 2018 Federal Budget, enhanced reporting for trusts was announced in an effort to increase transparency and help authorities combat the misuse of corporate vehicles to lower income taxes. The 2019 Federal Budget confirmed the Federal Government’s intention to proceed with introducing the enhanced reporting requirements. The enhanced reporting requirements were initially expected to be applied for the 2021 taxation year. However, the implementation was deferred until Bill C-32 (Fall Economic Statement Implementation Act, 2022) came into force.
Beginning in the 2023 taxation year, many trusts which were not previously required to file an annual income tax (T3) return will be required to do so. The deadline to file a return is 90 days after the trust’s tax year-end, generally March 31st for trusts with a December 31st tax year-end(except on leap years where the deadline will be March 30th).
Trusts will also be required to provide additional information detailing the trustees, beneficiaries, settlors, and any person who has the ability to influence or override a decision of the trustee(s), such as a protector. The information will be contained on a beneficial ownership schedule and is filed together with the T3 return; it cannot be filed separately.
The penalties for late filing the T3 return and beneficial ownership schedule will be $25 per day ranging from $100 to $2,500. For instances of gross negligence, or knowingly failing to file the information, an additional penalty equal to 5% of the maximum value of the property held during the relevant year will apply and will not be less than $2,500. These penalties are in addition to the existing failure to file penalties and interest for late payments.
For bare trusts, CRA is providing proactive relief by waiving the late filing penalty for the 2023 tax year in situations where the T3 return and beneficial ownership schedule are filed after the deadline. However, the gross negligence penalty has not been waived and may be levied by CRA in instances of gross negligence or knowingly failing to file the information.
Bare trusts can exist in both formal and informal arrangements. Two common examples of informal bare trusts are: (1) when a parent is on title to a property owned by their child for financing purposes only and does not have a beneficial interest in the property, and (2) when a child is on title to a property owned by their parent for probate planning purposes. In both instances, a bare trust exists and would be subject to these additional reporting requirements. There has not yet been any relief offered in respect of these informal trusts and filing would be required.
There are some exemptions to the enhanced reporting requirements which allow a trust not to provide the additional information and not file a T3 return. These exemptions include trusts that are graduated rate estates, qualified disability trusts, trusts that have been in existence less than 3 months, trusts which hold less than $50,000 in assets throughout the taxation year if the holdings are limited to deposits, government debt obligations, and listed securities, and other non-express trusts. An analysis must be completed to determine whether a trust could be exempt from filing under these new enhanced reporting rules.
If you would like our assistance in determining whether these enhanced reporting requirements apply to your trust, be sure to contact us for further information.