Enhanced T3 Trust Filing Obligations
As part of the crackdown on tax evasion and money laundering using Trusts, CRA has introduced enhanced Trust reporting rules for the tax year ending December 31 2023.
This involves filing a T3 Trust Return, including a detailed Schedule 15 providing Beneficial Ownership Information.
The deadline for filing a December 31 2023 T3 Trust Return is March 30 2024.
What is a Trust?
A trust arises when a person (the settlor) transfers an asset of value (the settled property) to a person or group of persons (the trustees) who administer the settled property for the benefit of a person or group of persons (the beneficiaries).
Old Rules…
Generally, under the old rules, a trust only had to file an annual income tax T3 return if the trust had tax payable or if it distributed all or part of its income or capital to its beneficiaries.
New rules…
There are three main changes:
- All trusts, unless certain conditions are met, will be required to file an annual T3 Return
- Trusts that are required to file a T3 (other than listed trusts) need to complete Schedule 15 Beneficial Ownership Information form
- ‘Bare Trusts’ are subject to the new reporting rules, and must file an annual T3 Return and Schedule 15
Bare Trusts
The biggest hurdle is with “Bare Trusts”.
A Bare Trust is a trust arrangement under which the trustee is considered to act as agent for all beneficiaries, with trust property.
The term is not defined in the Income Tax Act, and CRA has provided no guidance on whether a given scenario constitutes a Bare Trust.
There are numerous arrangements which may constitute a Bare Trust. Many people may not even realize that they may be part of a bare trust.
Often, such trusts are not documented in writing.
Assessing whether a bare trust exists may require a legal opinion.
Bare Trust - Key
The key to determining a bare trust arrangement – where there is a difference between beneficial ownership and legal title.
Consider – do you own something that is not in your name? Conversely, is your name on something that you do not own?
Ultimately, it is the intent of the parties at the time of the transaction that will likely determine whether a bare trust was constituted.
Examples of possible Bare Trusts
Trust accounts for specific clients of insurance brokers, real estate brokers/agents/managers. A general trust account may not be a bare trust, if specifically required by a governing body or law
Child added as joint owner of home for probate planning
Individual needs help to with getting a mortgage on a property. A relative helps out and is named on legal title
One spouse owns 100% of a rental property and splits income with the other spouse, on personal tax returns
Nominee corporations used in real estate transactions to separate holder of title from beneficial owners
A general partner in a limited partnership
In-Trust bank and investment accounts where child is added as joint owner. There is an exemption if cash assets and public securities are less than $50,000 in value
Penalties
There are significant penalties for negligence and failure to file or late-filing.
CRA has indicated that for the 2023 tax year, there will be no late filing penalties for Bare Trusts Only.
Information, Costs
There is a burdensome information gathering and detailed T3 filing requirement.
“Trusts” will also be required to obtain a Trust number (if they do not have one) from CRA in order to file a T3 return. This can be done online with CRA.
Costs, including legal consultation, assessing a situation, and preparing and filing a T3 Return will be substantial.
Finally
Please give some thought to your situation and existing arrangements to determine whether you may be subject to the new rules.
As there is little to no guidance or information available, each situation has to be assessed based on the facts and a determination made accordingly.
Please call us and we will discuss and help assess your situation.