Proposed changes to the trust reporting requirements

Posted on September 23rd, 2024 in Domestic Tax

Executive summary

The Department of Finance has proposed amendments to new trust filing rules introduced last year to relieve certain trusts from the obligation to file or to report certain information.

The types of trusts obligated to file a T3 tax return and information trusts must disclose were expanded for taxation years ending after Dec. 30, 2023. The changes were criticized as being overly broad and unclear, eventually resulting in the CRA administratively waiving the new filing requirement for bare trust arrangements just days before the filing deadline. On Aug. 12, 2024, the CRA released proposed technical amendments to the legislation (August Draft Legislation) to narrow the scope of the trusts required to file a T3 return. As these are only proposed amendments at the date of this article, they are subject to change.

Current Reporting Requirements

For taxation years ending after Dec. 30, 2023, Canadian resident express trusts must file a T3 return. For any trust which is a listed trust or is not a Canadian resident express trust, a T3 return must only be filed where income from the trust property is subject to tax and the trust:

• has Part I tax payable,
• is a Canadian resident trust who has a taxable capital gain or disposed of capital property in the year,
• is a non-resident trust who, except for excluded dispositions, has a taxable capital gain or disposed of Canadian capital property in the year, or
• Meets another criterion listed in the Canada Revenue Agency’s T3 Trust Guide (Guide).

Listed trusts include:

• Trusts in existence for less than three months during the year.
• Trusts who hold $50,000 or less in certain assets, including money or shares of a publicly traded company, throughout a year,
• General trust accounts for lawyers and;
• Non-profit organizations and graduated rate estates.

Additionally, these new rules introduce a filing requirement for bare trust arrangements.

All trusts which are not listed trusts must disclose information, including names and addresses, of each trustee, beneficiary, settlor and person who has the ability to exert influence over the trustees’ decisions regarding the appointment of income or capital of the trust. (Schedule 15 Requirement)

Proposed Amendments – Listed Trusts

Listed trusts are only required to file a T3 where they meet one or more criterion listed in the Guide and are exempted from the Schedule 15 Requirement. As a result, a listed trust will have less trust reporting requirements than other Canadian resident express trusts.

The August Draft Legislation amended the listed trusts to remove the restriction concerning type of assets for trusts at or below the $50,000 asset value limit mentioned above. As such, trusts who hold assets valued at $50,000 or less throughout the year, irrespective of the type of assets, will be considered listed trusts. The August Draft Legislation also proposed the following additional listed trusts:

• Trusts where:
  • All trustees and beneficiaries where individuals and the beneficiaries are related to each trustee,
  • The trust only holds certain types of assets, which includes money, GICs, shares of a publicly traded company, or personal use property throughout a year, and;
  • The value of those assets does not exceed $250,000 throughout the year.

• Trust that are required under rules of professional conduct or federal or provincial law to hold funds for the purposes of activities that are regulated under those rules or laws, provided the trust account that holds only $250,000 or less in money⁴ throughout the year, and no other assets. This would include lawyer’s trust accounts held for specific client(s).

and clarified that trusts created by statute, such as bankruptcy trustees or provincial guardians, will be considered listed trusts.

These amendments are proposed to apply to taxation years ending after Dec. 30, 2024.

Proposed Amendments – Bare Trusts

A bare trust arrangement is effectively where a trustee is acting as an agent of the trust beneficiaries in respect of the trust property. The trustee holds legal title of the trust property and deals with the property at the direction of the beneficiaries. These arrangements are common in the real estate, oil, gas and mining industries and partnership and joint venture business structures but may be used elsewhere, even unknowingly. Bare trusts are largely ignored for tax purposes, including that no tax is paid by the trust. Instead, any income of the bare trust is included in the beneficiaries’ taxes for the year.

The August Draft Legislation repeals the requirement for bare trust arrangements to file a T3 return for their 2024 taxation year. For the 2025 taxation year onward, it proposes that “deemed trusts” will be treated as express trusts for the purposes of filing an income tax return. As such, all Canadian resident deemed trusts will be required to file a T3 return if they are not a listed trust. Listed trusts and non-Canadian resident deemed trusts must file where income from the trust property is subject to tax and a criterion in the Guide is met. The Schedule 15 Requirement will apply to all deemed trusts who are not listed trusts.

Deemed trusts are bare trusts. However, the legislative definition is intended to be clearer and better rely on existing ownership concepts in trust law than the current definition of bare trusts in the Income Tax Act.

A deemed trust is defined as:

It also exempted the following arrangements which would otherwise be captured by the above definition:

Arrangement	Example
All legal owners are also beneficiaries	A joint spousal bank account
Legal owners are individuals and related persons, and the trust property is the principal residence of one or more of the legal owners.	A parent goes on title of their child’s house due to mortgage requirements. Child is also on title of the house.
The legal owner is an individual and the property would be their principal residence for the year (under the Income Tax Act), and the property is used by or held for for the benefit of their spouse or common-law partner.	A husband is solely on title of the family home where he and his spouse live.
A partner (other than a limited partner) holds property solely for the use of, or benefit of the partnership.	Two companies form a limited liability partnership to develop a piece of real estate and incorporate a general partner. The general partner goes on title for the piece of real estate.
The legal owner is holding the property due to a court order.
Canadian resource property is held for the use or benefit of one or more publicly listed companies (or subsidiaries or partnerships of such companies)	A publicly traded corporation holds the rights to explore and drill for petroleum at a particular site in Canada and allows use of that right by its wholly own subsidiaries.
A non-profit organization holds funds it received from federal or provincial governments for the use or benefit of other non-profits.

These amendments are proposed to apply to taxation years ending after Dec. 30, 2025.

 

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This article was written by Cassandra Knapman, Deanna Fisher and originally appeared on 2024-09-10. Reprinted with permission from RSM Canada LLP.
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