This article addresses tax changes impacting trusts. The changes are far-reaching: they impact trusts that you know about, but also situations where a trust can be considered to exist, such as “in trust” bank accounts.
Under the new rules, most trusts are now required to file an annual Trust Income Tax Return, as further explained below. Moreover, subject to limited exceptions, all trusts that have a filing obligation must now report extensive information on all persons involved in the trust. The new trust filing and reporting requirements apply for taxation years ending on or after December 31, 2023. For the taxation year ending on December 31, 2023, the tax return filing due date is March 31, 2024.
1. Highlights of the New Rules
A. Which trusts are now required to file a tax return?
The new filing requirement provides that all express trusts that are resident in Canada now have to file an annual trust tax return, even if the trust does not have any income to report and/or is not distributing any income or capital to its beneficiaries, subject to the exceptions described below. Trusts that would already have been subject to the obligation to file a tax return under the existing rules (such as trusts having tax payable or having allocated income or capital to beneficiaries during the year, for example) remain subject to the filing requirement. In other words, the new filing requirement supplements the existing filing requirement. Express trusts
Express trusts are trusts created with the settlor or testator’s explicit instructions, as evidenced by a Trust Deed or a will or, for Quebec civil law purposes, a trust other than a trust that is established by law or by judgment; this would, effectively, encompass most trusts that we come across. As a result, many trusts that previously did not have to file a tax return now have to file one under the new rules. A non-express trust is a trust that is imposed or created by courts, such as a resulting trust or a constructive trust; we rarely see these.Bare trusts
The new reporting rules apply to bare trusts. Bare trusts are generally deemed not to be trusts for tax purposes (i.e. they are generally disregarded), with certain exceptions including the filing of a tax return. The term "bare trust" is not defined in the tax legislation. A bare trust is a common law concept and it generally means a trust arrangement under which the trustee can reasonably be considered to act as agent for all the 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.
Note that the requirement for bare trusts to file a tax return does not alter the general principle according to which all income from the trust property should be reported on the beneficial owner’s tax return.
B. What new additional information now needs to be disclosed?
Subject to the exceptions described below, the new reporting rules require every trust which is required to file a tax return to disclose information that includes the name, address, date of birth, country of residence and taxpayer identification number (e.g. social insurance number) for all of the following persons in relation to the trust:
- settlor;
- all current trustees;
- all beneficiaries (including contingent beneficiaries); and,
- any person who has the ability (through the trust terms or a related agreement) to exert control over trustee decisions regarding the allocation of income or capital of the trust, such as a Protector.
The trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege.
C. What are the exceptions?
The following trusts (the “Listed Trusts”) are exempt from both the new requirement to file a tax return and the additional reporting requirements:
- graduated rate estates;
- trusts that have been in existence for less than three months at the end of the year;
- trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the taxation year (provided that their holdings are essentially confined to deposits, certain government debt obligations and listed securities – see note 1 below);
- qualified disability trusts;
- mutual fund trusts, segregated funds, trusts all of the units of which are listed on a designated stock exchange, and prescribed master trusts;
- trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, employee profit sharing plan, registered supplementary unemployment benefit plans, RRSPs, RESPS, RPP, RRIFs, TFSAs, first home savings account);
- lawyers' general trust accounts (note that trusts maintained separately for specific clients are not included in this exemption and are subject to the new filing requirement);
- trusts that qualify as non-profit organizations or registered charities;
- employee life and health trusts;
- certain government funded trust; and
- cemetery care trusts or a trust governed by an eligible funeral arrangement.
Note 1: If a trust holds assets that are valued at less than $50,000, including its settled property which is a collectible silver coin, it will not meet the requirements of this exception.
Although a Listed Trust is not subject to the new filing requirement, a Listed Trust may still be required to file a tax return under the existing rules.
D. What are the penalties for non-compliance?
Failure to file a trust tax return or provide the new information required will result in a late filing penalty generally calculated as follows:
- If there is an unpaid tax balance on the filing due date: 5% of the unpaid tax as of the filing due date plus 1% of such unpaid tax for each full month that the tax return is late, to a maximum of 12 months; and
- If there is no outstanding tax balance on the filing due date: $25 a day for each day the return is late, from a minimum of $100 to a maximum of $2,500.
If the trust is not a Listed Trust and the failure was made knowingly or due to gross negligence, a new, additional penalty will apply. This penalty will be equal to the greater of
- 5% of the maximum value of property held during the relevant year by the trust; and
- $2,500.
This gross negligence penalty is in addition to the existing penalty applicable in those circumstances, which amounts to 50% of the understated tax and/or the overstated credits related to the false statement or omission. A different penalty structure applies to Listed Trusts.
In December 2023, the Canada Revenue Agency (CRA) announced that it will provide relief to bare trusts only if the trust tax return is filed after the filing deadline for the 2023 tax year only. However, if the failure to file the tax return was made knowingly or due to gross negligence, the CRA may still apply the new additional penalty.
Quebec has generally harmonized with the above-discussed federal measures with applicability from the same dates as for federal purposes, except for the relief granted to bare trusts.
2. Applicability of the New Rules to Certain Situations
Below are comments regarding selected specific situations where the new trust filing requirements should be considered. This list is not exhaustive and other situations may exist and may need to be reported.It is also important to keep in mind that each situation should be reviewed based on its own set of facts. Some situations could fall in gray zone considering the limited information published by the tax authorities regarding the new trust filing requirements. If you think that one of the following situations may apply, please contact your Crowe BGK advisor to determine if the new trust filing requirements apply.
A. Common Law Bare Trust Agreements: Bare trusts governed by a common law jurisdiction such as Ontario are commonly used to:
- ensure confidentiality and maintain the anonymity of the true owner of a property when the ownership information is public record (such as land registration records);
- minimize provincial land transfer taxes or probate fees in transactions where the beneficial ownership of a property is being transferred between multiple parties, but there is no change to the legal title held by the trustee;
- facilitate efficient property transfer in corporate reorganizations where the legal ownership of property may otherwise need to be transferred and registered multiple times, or if the legal ownership cannot be transferred at the desired time due to administrative issues;
- gift a minor child or children with property who cannot hold a legal title; or
- hold legal title of a property on behalf of a group of owners in a joint venture or partnership.
The CRA has confirmed that common law bare trust agreements are subject to the new trust filing requirements since a bare trust is considered an express trust. Caution is advised as that these trust agreements may have been put in place several years ago and the trustees and/or beneficiaries may no longer be aware that they exist.
A bare trust arrangement can involve a nominee corporation holding the legal title of a property. A number of authors have opined that in this case, even though BareCo is a corporation, as a bare trust it will now be required to file a trust tax return (in addition to its existing requirement to file a corporate tax return). The CRA has not commented on bare trust situations involving corporations.
B. Quebec Prête-nom Agreements: Prête-nom agreements governed by Quebec civil law are sometimes set up to hold real estate or for other purposes.
The CRA and Revenu Québec have not issued any comments on the applicability of the new trust filing requirements to Quebec prête-nom agreements. While the matter is not entirely free from doubt, it would appear that this type of agreement is outside the scope of the new trust filing requirement.
C. Non-registered Investment Account for a Minor (or Other Relative): A parent may open a non-registered investment account for their child (who is a minor). In this case, the financial institution issues tax slips in the name of the parent “in trust for” the child.
This situation would likely be considered as a trust for purposes of the new reporting requirements.
D. Authorization to Handle a Relative's Bank Account: As they age, certain individuals may decide to grant authorization to a family member to handle their bank account to ensure that funds will not be frozen should they become incapable to managing their account.
This situation does not appear to create a trust filing requirement as no trust arrangement seems to exist in this case.
Please do not hesitate to contact your Crowe BGK advisor to assess the potential consequences that the new trust tax requirements may have for you.