Dear Valued Clients & Friends,

As we gear up to celebrate Family Day, we’re excited to take a moment to honor the essence of family, both at home and within our workplace community. Family Day is a time to cherish those closest to us, to create lasting memories, and to reinforce the importance of family bonds. At AR Jaffer Professional Corporation, we believe in fostering a sense of belonging and support not only for our clients but also for each member of our team and their families. Sending blessings to all and hope 2024 has gone well with you so far, and you were able to spend quality time with your loved ones this weekend.

With tax season approaching, it is good time to start assembling your documents to have them ready to ensure your taxes are filed on time.  Stay tuned for the personal tax update edition of our newsletter in a few weeks.   If you have missed any editions of the newsletter, please click on the following link:  AR Jaffer PC Newsletter Archives

In this edition of the newsletter, I will be discussing the recently approved Trust Reporting Rules for the 2023 tax year, highlighting some new and expanded filing requirements with an effective date of December 31, 2023.   As the tax system in Canada continues to involve, there have been some significant changes, with the recent Underused Housing Tax (UHT) and the residential flipping rules and most recently, the Enhance Trust Reporting rules. The deadline to file T3 trust returns is April 2, 2024.   In the past, most taxpayers were exempt from these rules, but CRA has recently modified the trust reporting rules.

Please read the details of this Newsletter as it may impact you.  This new filing requirement includes bare trust arrangements, and many taxpayers may not even be aware of their need to file a T3 Return.  For example, you may have an “in trust” account, or an investment account with two or more names registered on it; and beneficial ownership resting with only one of the named account holders.  In both these cases the person who is not the beneficial owner is required to file the T3 Return.

Further details on the new trust reporting requirements can be found at:   https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html

 

• What is a Trust?

A trust is a binding obligation enforceable by law when undertaken. It may be created by one of the following:

• a person (either verbally or in writing).
• a court order; or
• a statute.

Generally, a trust is created when it is properly established and there is certainty of:

• the intent to create a trust.
• the property to be placed in trust; and
• who the beneficiaries of the trust are.

 

Settlor – Generally means the person who set up a trust by contributing property to the trust. In the case of a preferred beneficiary election, a settlor is restricted to a person who is otherwise the settlor of the trust and has contributed the majority of property to the trust.

Trustee – An individual or trust institution that holds legal title to property in trust for the benefit of the trust beneficiaries. The trustee includes an executor, administrator, assignee, receiver, or liquidator who owns or controls property for some other person.

Beneficiary – Includes the person for whose benefit the trust is created, the person to whom the amount of an insurance policy or annuity is payable, or the unit holder of a mutual fund trust.

 

• What are the new trust reporting rules?

 

The rules governing which trusts must file an annual T3 Trust Income Tax and Information Return (“T3 Return”) have been changed for trusts with a taxation year ending after December 30, 2023. Specifically, all trusts, unless specific conditions are met, must now provide a T3 Return including additional beneficial ownership information on an annual basis.

Under the old rules (which apply to taxation years ending December 30, 2023, or earlier), a trust resident in Canada is generally not required to file an annual T3 income tax return unless the tax is payable by the trust for the year, or the trust disposes of capital property. The CRA has provided further administrative relief where only nominal income was earned by a trust or allocated to Canadian-resident beneficiaries.

The new rules drastically limit these exceptions. Most personal trust residents in Canada will now be required to file an annual return even where there is no income tax liability, and the trust made no distributions or allocations during the year. Trusts that include an arrangement where the trust can reasonably be considered to act as an agent for its beneficiaries, commonly known as “Bare Trusts”, will be expressly subject to the new reporting requirements.  As a result, many trusts that did not previously have to file are now required to file an annual T3 Return.

Limited exceptions continue to be provided for trusts which:

• have been in existence for less than three months at the end of the year; or
• hold less than $50,000 in assets throughout the taxation year (provided their holdings are confined to cash, certain debt obligations, and listed securities)
• Certain estates.

 

• Why Were the Reporting Requirement Changes Made?

These changes were made as part of Canada’s continuous efforts to ensure the effectiveness and integrity of the Canadian tax system. The changes will help the CRA verify that trusts, their fiduciaries, beneficiaries, and related parties have met their tax and filing obligations under the Income Tax Act.

 

• What is a Bare Trust?

One of the most significant changes is that the new reporting requirements also apply to “Bare Trusts”. A bare trust includes an arrangement where the trust can reasonably be considered to act as agent for its beneficiaries with respect to all activity and participation in all the trust’s property. Prior to 31 December 2023, bare trusts were excluded from the T3 return filing requirement.  However, under the new rules, a bare trust will be required to file an annual T3 return unless an exemption applies. Under the expanded requirements, many other informal trust and agency relationships may now require an annual T3 return. The following includes examples of situations where a T3 return may now be required:

• A bare trustee corporation acts as the title holder to an asset for the benefit of someone else, such as holding the title to investments in a nominee corporation.
• An individual holds an “in trust” bank or investment account for a child or a parent.
• A parent corporation holds cash in trust for underlying subsidiaries
• A general partner, typically a corporation, in a limited partnership arrangement is the title holder to the underlying assets of the partnership. This arrangement is typically used in real estate investments but may also include business operating partnerships.
• An individual has purchased a property “in trust”, but the actual owner is not clearly identified. This arrangement is commonly used with real estate purchases or certain pooling of private investments where the title holder or purchaser is not the true underlying economic or beneficial owner of the property; and
• An individual is registered on the title of any real estate that they do not beneficially own (e.g., a named interest on a child’s or parent’s home for estate planning purposes).

In these scenarios, the person/entity listed as the owner of an asset may not be the true beneficial owner; instead, they hold the asset on behalf of another party.  A true beneficial holder can exist in a case where the person may reap the benefits of the asset (for example when the asset is sold) or are bearing the risks of the asset, such as property taxes or paying for the maintenance of the property.  A bare trust does not have to be formally prepared, therefore there is a lot of uncertainty in the recent CRA trust filing requirements.   A bare trust could exist without a lawyer drafting any formal trust document or there may not be a formal written agreement in place.

Many bare trust arrangements, such as those commonly used in joint ventures, real estate holdings, or probate planning, that were previously not subject to T3 reporting requirements will now have to consider the additional costs of compliance.

• Do you have a Bare Trust arrangement, or does it exist?

Here are some common situations where a bare trust arrangement may exist (note these are some examples and the list is not exhaustive):

1. A child in on title of a parent’s home for estate planning purposes
2. A child may be listed on a parent or grandparent’s bank account or investment account.
3. A parent or grandparent is on title of a child’s home.
4. A parent of grandparent is the owner of a bank account, savings bond or other investments for their children or grandchildren.
5. Only of the spouses are on title for their house or condo, although the other spouse may be a beneficial owner.
6. For business owners, a corporation or partnership may be on title of individual’s real estate, company vehicle other assets or vice versa.

 

• Information Disclosure Requirements

 

The current prescribed T3 forms and schedules require only limited information regarding the parties to the trust.

Under the new rules, every trust that is required to file a T3 return must disclose information that includes the following for the trustee, beneficiary, settlor and each person who has the ability (through the terms of the trust or a related agreement) to exert influence    over trustee decisions regarding the appointment of income or capital of the trust.

1. Name
2. Address
3. date of birth
4. jurisdiction of residence
5. taxpayer identification number (TIN) (i.e., social insurance number, business number, trust account number or foreign TIN) for each:

 

• Filing Requirements, Deadline & Penalties

If the new trust reporting rules apply in your situation, you must file a T3 Trust return by April 2, 2024.  Failure to file will result in a penalty of $25 per day, up to a maximum of $2,500.

Although, CRA recently announced relief for bare trusts by waiving late-filing penalties for 2023 bare trust T3s where the T3 return and new T3 Schedule 15 are filed after the filing deadline (April 2, 2024), there is currently no indication on what the deadline is in order to receive the administrative relief from penalties.  My suggestion is to file before April 2, 2024, if any of the filing requirements listed above applies to you.

With the UHT and residential flipping rules announced last year, and the trust reporting rules recently announced, the past couple of years have had the most significant changes to the Income tax act, therefore many taxpayers may be impacted.  If any of these trust rules apply to your tax situation, please contact us and we can assess whether you are required to file and then assist with the filing process.

Have a safe and happy family day!

 

Sincerely, 

Ali Raza Jaffer, CPA, CGA, MBA, BComm

Partner & CEO, AR Jaffer Professional Corporation

Chartered Professional Accountant

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