This income tax season will look different for Canadian trusts: the Government of Canada has implemented new filing requirements that are applicable to trusts. The changes apply to trusts with a taxation year ending after December 30, 2023. While there are some exceptions to the new filing requirements, most trusts will now be required to file an annual T3 Trust Income Tax and Information Return ("T3 Return"). These new filing requirements apply to many trusts that have not previously been subject to filing requirements, including bare trusts.
A trust describes the relationship that exists where there is distinction between the legal title and the beneficial title of property. A trust is created when one party (the "Settlor") transfers property to another party (the "Trustee") to hold for the benefit of a specific person or group of people (the "Beneficiaries"). As a result, a trustee holds legal title of the property, and the beneficiaries hold beneficial title of the property. Trusts are a common tool used in tax, estate, and corporate succession planning contexts.
While trusts can be created through formal legal documents, they are also capable of being created informally. Bare trusts are an example of trusts that are often created informally and, as a result, trustees of bare trusts may be unaware of the new filing requirements imposed by the Government of Canada that they are now obligated to adhere to.
A bare trust is a type of trust that mirrors a principal-agent relationship. The Canada Revenue Agency ("CRA") defines a bare trust as a trust where the trustee holds legal title to the trust property but has no duties, obligations, or responsibilities with respect to the trust property. Under a bare trust, the trustee simply acts as agent and pursuant to the direction and authority of the beneficiaries, who have beneficial title to, and control of, the trust property.
An example of a common arrangement that is likely to be considered a bare trust exists where a parent is listed on title of a home that their adult child is living in. Although this typically stems from the child's need for assistance with securing mortgage financing, the resulting arrangement functions as a bare trust: the parent holds legal title to the home but do not exercise any control over responsibility over it. Accordingly, the new filing requirements would encompass this type of arrangement and the parent would be required to file a T3 Return. These are the types of arrangments where trustees may be unsuspecting of the new reporting requirements.
In addition, here are penalties for non-compliance with the new filing requirements. Bare trusts that fail to file a T3 Return will be subject to a late filing penalty of $25.00 per day up to a maximum of $2,500.00. However, the CRA has announced that the late filing penalties for bare trusts will be waived for the 2023 taxation year. The waiver is imposed to focus on education during this period of adjustment for bare trusts that have not been subject to filing requirements prior to the 2023 taxation year. It is important to note that the waiver will not extend to situations where failure to file is made knowingly or due to gross negligence. In those circumstances, the CRA will also impose a penalty of $2,500.00, or % of the highest amount of the fair market value of trust property in the taxation year, whichever is greater. Ultimately, the new filing requirements require examination of existing relationships to determine if they function as bare trusts and are consequently obligated to file a T3 Return.
If you have any questions about these new filing requirements and how they may apply to you, please contact our team.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.