New trust reporting rules include in-trust accounts, jointly owned assets

If your clients have set up an in-trust-for (ITF) account for their minor child or they own certain assets jointly, they could be subject to new trust reporting rules that apply for taxation years ending after Dec. 30. These new rules could require your clients to file a T3 Trust Income Tax and Information Return within 90 days of the year-end, even if there is no income or activity to report.

The new reporting requirements were initially applicable only to express trusts, which are trusts created using the settlor’s clear written or verbal intent (as opposed to arising by operation of law). However, these rules were later expanded to include bare trusts, which are defined under the legislation to include “an arrangement where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all of the trust’s property.”

Based on this expanded definition, if your clients have arrangements where beneficial ownership is separated from legal ownership of an account or asset, they could be subject to these reporting requirements.

As an example, if your clients added their child(ren) to title of their house to simplify estate administration and minimize probate fees, without transferring any beneficial interest, these clients would be subject to the new trust reporting rules. Similarly, if your clients were added to title of their children’s house (without any beneficial interest) to help them qualify for a mortgage, they would now have to report this arrangement on a T3 return.

Another common arrangement that can be considered a bare trust and subject to these rules is when your clients have an ITF account set up for their child or grandchild.

A new beneficial ownership schedule (T3 Schedule 15 Beneficial Ownership Information of a Trust) has been added to the T3 return that will require your clients to provide certain information for all trustees, beneficiaries (including contingent beneficiaries) and settlors of the trust.

In addition, information regarding any person who can exert influence over the trustee decisions regarding allocation of income or capital would be reportable. The information to be reported would include the name, address, date of birth (for individuals), jurisdiction of residence, and taxpayer identification number (such as social insurance number for individuals and business number for corporations).

Given that trusts typically have a calendar year-end, the first tax return for 2023 would be due by April 2, 2024 (as March 30 falls on a Saturday, and April 1 is Easter Monday).

If the T3 return is not filed on time, your client can be subject to penalties. For the 2023 tax year, bare trusts have been granted temporary relief and won’t be subject to late-filing penalties. Going forward, the penalty is $25 for each day the return is late, with a minimum penalty of $100 and maximum penalty of $2,500.

An additional penalty can apply for gross negligence (if the return is not filed knowingly or false/incomplete information is provided) equal to the greater of $2,500 or 5% of the highest value of the trust property in the year.

Exceptions to the reporting requirements

Certain trusts are excluded from these new reporting requirements:

• trusts that have been in existence for less than three months at year-end
• trusts that hold only certain assets (such as cash or securities listed on a designated stock exchange) and have total fair market value of $50,000 or less throughout the year
• registered plans such as the RRSP, RRIF, registered pension plan, registered disability savings plan, RESP, TFSA and first home savings account
• graduated rate estates and qualified disability trusts
• mutual fund trusts and registered charities (including express internal trusts held by registered charities)

As the reporting requirements can be onerous, it is important for your clients to work with their tax and legal advisors in advance of the deadline to gather all the information required for these new rules. In addition, they may consider evaluating whether any dormant trusts should be dissolved to minimize compliance obligations in the future.

Vivek Bansal

Tax Strategies

Vivek Bansal, CPA, CA, is director of tax and estate planning with Mackenzie Investments. He can be reached at vibansal@mackenzieinvestments.com.