Effective for taxation years ending after December 30, 2023, the Canadian government has expanded the trust rules to now require trusts (with limited exceptions) to file a T3 trust income tax and benefit return (T3) and provide detailed disclosure on the trust’s key persons, such as the settlor, trustee, and beneficiaries. Failure to comply with the filing obligations can result in hefty penalties.

The government has previously vocalized their concerns about taxpayers utilizing trusts in complex arrangements to prevent authorities from obtaining appropriate information required. The expanded rules are designed to improve the collection of beneficial ownership information in respect of trusts to allow the CRA to determine the taxpayer’s tax liabilities and to effectively counter aggressive tax avoidance as well as tax evasion, money laundering, and other criminal activities.

Who is required to file a T3?

Express trusts are required to file an annual T3. The CRA defines an express trust as a trust created with the settlor’s express intent, usually made in writing. The Income Tax Act (ITA) provides for limited exceptions to the filing obligations. In addition, the ITA also requires bare trusts and arrangements to file a T3 and the related forms.

A bare trust arrangement is broadly defined by the ITA as “an arrangement under which a trustee can reasonably be considered to act as agent for all beneficiaries under the trust with respect of all dealings with all the trust’s property”. The broad definition could capture a wide range of arrangements, including in trust for accounts (ITF) where a parent or grandparent opens a bank or mutual fund account for the benefit of a child. Depending on the circumstances, the ITF account could be considered an agency agreement where the (grand)parent is the bare trustee (acting as an agent) on behalf of the child who is the beneficial owner.

Exceptions to the filing requirements

Below are the limited exceptions of trusts which may be exempt from trust filings:

• Trusts that have been in existence for less than 3 months
• Trusts that hold assets where the fair market value (FMV) throughout the year does not exceed $50,000 (the assets are limited to money, deposits, government debt obligations, and listed securities)
• Trusts under or governed by certain registered plans (e.g., RRSP, RRIF, RESP, TFSA, FHSA, etc.)
• Qualified disability trusts
• Graduated rate estates
• Mutual funds trusts, segregated funds, and master trusts (note: trusts that hold these assets may be subject to the new filings)
• Trusts that qualify as non-profit organizations or registered charities
• Certain regulated trusts, such as lawyer’s general trust accounts
• Employee life and health trusts
• Certain government-funded trusts
• Cemetery care trusts and trusts governed by eligible funeral arrangements

With the limited exceptions, this means that trusts which are commonly used to hold family vacation properties, cottages, or shares of private corporations as part of an estate freeze will now be required to file a T3 and its related forms.

The exceptions may reduce the tax filing burden for in-trust accounts to the extent they have either been in existence for less than 3 months or hold assets with a FMV of less than $50,000 in the year.

In addition, the CRA confirmed at the 2023 National Conference for the Society of Trust and Estate Practitioners (STEP) that collectible gold or silver coins or bars, which are often used to settle a trust when it is first established, are not considered to be “money” for the purposes of the trust filing exceptions.

Filing requirement

If a trust does not meet any of the above exemptions, the trust will be required to file an annual T3 within 90 days of the taxation year end, reporting all income, gains, and losses realized for the tax year. For most express trusts, the tax year end is December 31 and the T3 would be due on March 31.¹

In addition to the T3, additional disclosure (Schedule 15) reporting the name, address, date of birth, residency, and tax identification number (e.g., SIN, business number, trust account number, etc.) for each trustee, beneficiary, or settlor of the trust is required. Disclosure is also required for individuals with the ability to exert influence over trustee decisions related to the appointment of income or capital of the trust (i.e., a protector).

In respect of the beneficiaries, a trust is considered to have met their reporting obligations if it provides the above information for each trust beneficiary whose identity is known or ascertainable with a reasonable effort at the time of filing. Where this cannot be done, sufficient information should be provided to determine if a person is a beneficiary (i.e., terms of the trust describing the class of beneficiaries). At the 2023 National STEP Conference, the CRA confirmed that the trusts will also need to disclose contingent beneficiaries regardless of how remote their interest may be.

Any individual who transfers or loans property to the trust is considered a settlor and must be reported as part of the additional disclosure. Transfers made in exchange for fair market consideration or loans which are made at a reasonable rate of interest, and where the party deals at arm’s length with the trust, are not considered to be settlors and are exempt from the reporting.

The trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege.

Penalties for non-compliance

Where there is no tax balance owing, a late filing penalty of $25 a day for each day the return is late will be assessed, with a minimum of $100 to a maximum of $2,500. This penalty will also apply if the required additional disclosure is not included with the return. Where there is a tax balance owing, the penalty is 5% of any balance owing, plus 1% of the balance owing for each full month that the return is late, to a maximum of 12 months.

Additional gross negligence penalties could apply where a failure to file the return was made knowingly or due to gross negligence, or false statements and omissions were made in the return filed. The penalty is 5% of the maximum value of trust property for the relevant tax year, with a minimum of $2,500.

¹ The due date is March 30 in a leap year.

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