The Revised And Expanded T3 Trust Return

There are so many issues to deal with arising from the expanded reporting requirements for the T3 Trust Income Tax and Information Return effective for 2023 and subsequent tax years. These new rules are both complex and confusing. Unfortunately, this article must quote extensively from CRA publications because the new trust reporting rules narrow or alter certain concepts from what a lay person or even some legal experts would understand might be the case.

Not only has the definition of what constitutes a reportable trust been expanded but tax preparers will now have to cope with a myriad of complex rules to determine if the taxpayer’s situation falls under these new and very broadened reporting scope which did not previously exist.

Schedule 15 has been added to the new T3 return (Beneficial ownership information of a trust) to provide CRA with personal details about trustees, beneficiaries, settlors and controlling persons. A controlling person includes any person who has or might have the ability, because of the trust terms or a related agreement, to exert influence over trustee decisions regarding allocation of trust income or capital – even unborn children must be shown.

The Federal government felt the need for this wider mandate 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 filing obligations under the Income Tax Act.

Taxpayers might say that the new rules have gone too far, are too complex and are an invasion of taxpayer privacy. The penalty costs can be surreal when disagreements arise between CRA and taxpayers on the scope or interpretation of the new rules.

At the end of March 2024, CRA had an about face on the new bare trust rules and has deferred that aspect of the new rules until next year, but the other parts remain including the filing of Schedule 15.

A Trust Has Legal Roots Modified By Tax Rules

A trust is a relationship and not a legal entity under which the trustee holds legal title to trust assets for a beneficiary or beneficiaries who hold the beneficial title to the trust property. The terms and conditions of a trust do not have to be set out in writing, but it is preferable to do so to avoid misunderstandings and even future litigation.

Bare Trusts

CRA says the term bare trust is not defined in the Income Tax Act. However, a bare trust for income tax purposes is a trust arrangement under which the trustee can reasonably be considered to act as agent for all beneficiaries under the trust with respect to all dealings with all of the trust’s property. A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all trust property.

Until these recent amendments to the Income Tax Act came along, bare trusts were not subject to T3 reporting because of the limited scope of the arrangement and the trustee’s lack of authority. Now, all of that has changed and a T3 tax return must be prepared for bare trusts.

My reading of the new rules tells me that there is disagreement even in legal circles as to whether a particular arrangement is a bare trust. Say for example Mr. and Mrs. Jones opened a joint bank account together – this is probably a co-ownership and not a bare trust. But say Mrs. Jones already had a bank account and she added Mr. Jones as a signing authority on the account with implied limitations– most would say there is now a bare trust arrangement. And if this happened twenty years ago who will remember just how it all happened.

Or let’s say a family member has been asked to take over the finances of an elderly relative by being added as a signatory to the person’s bank account with limitations. Presto, have they created a bare trust that must now file a T3 return? I think so.

Let me give you another example where some might argue that bare trust could exist. Jane and John Smith each opened their own investment accounts at the same brokerage firm. Jane’s account is called the Jane and John Smith account, and John’s account is called the John and Jane Smith account and neither have signing authority on the other account. Have they each established bare trusts – I think not because of the lack of dual account authority.

The New Reporting Rules Begin With 2023 T3 Returns Due On April 2, 2024

T3 trust returns with few exceptions must have a calendar year end – December 31. And since the returns are due within 90 days of the year end, T3 returns are due at the end of March. The government cleverly made the new rules effective for tax years ending after December 30, 2023, which will obviously catch 2023 T3 returns under the new rules.

Professionals ñ Their New T3 Fiduciary Responsibilities

If you are a personal tax advisor, a banker, or an investment advisor some of your clients no doubt will be affected by the new rules and be required to file the T3 returns where a filing was not previously required. It seems to me that professionals have a responsibility to know these rules and point them out to their clients. Otherwise, severe penalties could apply and clients might look to professionals for restitution.

Schedule 15 Beneficial Ownership Information Of A Trust

Under the new rules, T3 trust returns, except for listed trusts, must include a new Schedule 15 to report the names and other personal details of all trustees, settlors, beneficiaries, and controlling persons and together referred to as reportable entities.

Controlling persons are defined as persons who have the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the apportionment of income or capital of the trust. It seems to me that’s a loaded question as to whether someone can exert influence over a trustee. In my mind this is only possible if it is done legally, ethically and without coercion but if not, they shouldn’t count as a controlling person.

A listed trust still must still file a T3 return (subject to the usual filing exemptions) and is only excluded from filing Schedule 15. If the trust is a bare trust the trust income would be shown on the beneficial owners’ personal tax return and not on a T3.

I confirmed all of this with a CRA agent.

Listed trusts are trusts referred to in paragraphs 150 (1.2) of the Income Tax Act and include the following:

a trust that has been in existence for less the three months.

a trust that holds assets whose fair market value does not exceed $50,000 throughout the year and are confined to money, certain debt obligations, certain securities listed on a stock exchange, mutual funds, segregated funds.
a graduated rate estate.
a qualified disability trust.
a registered charity.
certain clubs, societies, or associations.

There are other trusts that are listed trusts, but these are largely confined to legal entities such as pension plans, mutual fund trusts and other publicly organized entities.

Information to be provided about reportable entities must include the following:

name.
address.
date of birth if applicable.
country of residence.
tax identification number (social insurance number, business number or in the case of a non-resident trust, the identification number assigned by a foreign jurisdiction).

CRA says that if the above information cannot be provided because the beneficiary is unknown at the time of filing the T3 and Schedule 15 (for example, unborn children and grandchildren, their spouses) information must be provided on Schedule 15 under Part C detailing the terms of the trust that extend the class of beneficiaries to unknown beneficiaries. Talk about CRA draconian intrusiveness.

This level of information will obviously require the T3 filer to contact others to obtain this information and hence disclose to them that they may be a beneficiary of the trust. This deeply offends the privacy of trusts for which they may have been created in the first place.

If you need to file Schedule 15, you must also file a T3 because the schedule is part of the T3.

Trusts As Defined By The New Reporting Rules

CRA recently issued a publication called New Trust Reporting Requirements for T3 returns filed for tax years ending after December 30, 2023 (NTR), to set out details of the new T3 reporting regime. That document defines the trusts required to file a T3 and they include the following:

Express trusts.
For civil law purposes, a trust is other than a trust that is established by law or by judgement.
Other trusts meeting certain criteria such as having tax payable, have been requested by CRA to file, have provided a benefit of more than $100 to a beneficiary and for some other reasons too many to mention here.
Bare trusts.

Express Trusts

The publication outlining reporting requirement referred to above defines an express trust as one that was created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute).

As is stated in the first few pages of the NTR, all trusts, unless certain conditions are met, will be required to file an annual T3 Return with the CRA. As was mentioned earlier, a bare trust is subject to the new reporting rules but that is now deferred until the 2024 tax year.

And finally, the NTR says that generally, an express trust is a trust created with the settlor’s express intent, usually made in writing. Trusts also include what are commonly known as bare trusts where the trustee holds property with no ability to deal with it in any way except with the consent of the beneficial owner. This for example might include the holding of legal title by a parent to a home for a child who is the beneficial homeowner and occupant but often doesn’t meet the financing conditions of the lender.

So, there is not much doubt that CRA intends to apply T3 filing for almost every conceivable trust arrangement including listed trusts (exempt from Schedule 15 filing).

Getting A Trust Account Number

For those who have filed a T3 in the past, the new level of reporting especially with respect to Schedule 15 will be daunting. For those who have never filed a T3 but must now do so, the process and level of information required will seem utterly impossible. Here are some filing rules you need to be aware of requiring for account numbers:

Every trust must obtain a tax account number before filing a T3 online.
You can obtain the account number online or by writing to CRA and provide them with a variety of information – type of trust, trust name and a copy of the complete signed trust agreement, deed or settlement or will, bare trust agreement and other types of trust documents too numerous to mention here.

Filing Penalties

If any trust (including a bare trust) fails to file a trust return under the new rules, the late-filing penalty would be $25 a day (minimum $100, maximum penalty of $2,500). An additional penalty equal to the greater of $2,500 or five percent of the maximum value of value trust assets would be applied where failure to file was made knowingly or due to gross negligence. Ouch!

You should review your situation with a professional advisor and if it is concluded that there is no trust in certain situations, then you should document your reasons in writing to avoid possible penalties for gross negligence in case CRA comes knocking on your door a few years down the line.

Page 23 of CRA’s T3 Trust Guide – 2023 sets out some of the penalty provisions.

CRA has said that As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance providing proactive relief by waiving the penalty under subsection 162 (7) (non-negligence) for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline. That has now been undone with the deferral of bare trust filing until next year.

Summing Up

This whole thing is an unfortunate and an intrusive step in CRA’s enforcement procedures. Granted, some of the steps may have been necessary to protect the fisc, but in my opinion, the CRA has gone too far in inflicting such onerous reporting requirements on everyday people. As was said earlier, get some professional advice and document your position in writing if you conclude that a T3 filing is not necessary.

But none of this is going away. So, reach out, find professional help, and get on with your new tax filing responsibilities. What else is there to say?

Ed Arbuckle, J. E. Arbuckle Financial Services

jea@personalwealthstrategies.net