by Safiyya Vankalwala

[Updated March 28, 2024]

This year’s tax filing season may be looking different for some people and corporate entities due to new trust reporting rules. These changes, while presenting challenges, also offer legal professionals an opportunity to educate their clients.

Overview

Previously, trusts were only required to file a T3 Trust Income Tax and Information Return (“T3”) under specific conditions, such as having taxable income or capital gain. However, under the new rules, all express trusts (unless classified as a listed trust), resident or deemed resident in Canada, must file an annual T3, capturing comprehensive information about beneficiaries, trustees, settlors, and controlling persons. Unknown beneficiary information will also need to be included, such as unborn children that may be future beneficiaries of the trust.

Key mention – bare trusts

Notably, bare trusts, which were previously exempt, will now be required to file an annual T3 (unless classified as a listed trust).

A bare trust is a type of trust in which the beneficiary has complete and unconditional rights to both the capital and income of the trust. This means the beneficiary has full control and ownership of the trust’s assets, and the trustee holds the legal title on behalf of the beneficiary without any conditions. A bare trust can involve multiple trustees and beneficiaries. While the arrangement is sometimes detailed in a written document, it can sometimes lack formal documentation (often on purpose to avoid a paper trail) which may lead to challenges when it comes to the new reporting rules.

Deadline and penalties

The filing deadline for T3 submissions is generally March 30, but for the calendar year 2024, it extends to April 2 due to March 30 falling on a Saturday and April 1 being a federal holiday. Failure to comply with the new reporting requirements carries substantial penalties.

On March 28, 2024, CRA released a bulletin that bare trusts are exempt from trust reporting requirements for 2023.

Documentation Requirements and Resources

To adhere to the new regulations, a trust account number from CRA, the trust document, and name of the trust is required.

A comprehensive breakdown of reporting requirements can be found on the Government of Canada’s website.

Examples of transactions

Outlined below are instances where the new reporting rules will be pertinent, along with additional tips for consideration in various legal fields:

Wills & Estates

  • Transfer of home to a bare trustee corporation for probate avoidance.

    • Additional practice tip: Discuss the need for secondary/multiple wills.

  • Adding a joint owner to a bank account for convenience and Estate Administration Tax (“EAT”) avoidance, but would like the proceeds in that account, post death, divided among the original owner’s children equally.

    • Additional practice tip: Explain EAT asset inclusion rules and the need for clear instructions/wishes in the power of attorney and last will and testament.

Real Estate

  • Trust agreement for property ownership with co-signer. For example, an adult child could not qualify for the mortgage on their own, so a parent co-signed and took title with 1% interest and the remaining interest in the name of the adult child.

    • Additional practice tip: These arrangements are often informal and undocumented. However, it can cause many challenges down the road. Strongly recommend a written trust agreement which states that the parent holds the 1% interest in trust for the adult child..

Family law

  • Purchase of property with title to be held by a trusted family member, without written documentation of this arrangement, to shield the property from equalization upon separation.

    • Additional practice tip: Discuss the importance of documentation and strongly encourage seeking family law advice.

Corporate

  • A corporation holds shares in another corporation in trust for an individual.
  • One corporation holds funds in trust for another corporations.

    • Additional practice tip: Address potential complication and ensure compliance with relevant regulations.

Practice Management Tip

Given the increased compliance burden, lawyers advising on transactions subject to the new rules should maintain a consistent approach. Clients should be made aware of the updated rules, and lawyers should document advice, emphasizing the importance of seeking professional advice.

A well-drafted retainer agreement and detailed reporting/closing letters are essential components in effectively communicating legal services and maintaining clarity throughout the lawyer-client relationship. Sample retainer letters can be accessed on practicePRO.ca.

Ensure meticulous documentation of the advice you provide to your clients, preserving comprehensive notes within your files. Upon the conclusion of the transaction, furnish your client with a comprehensive reporting/closing letter. This document should delineate the guidance provided, especially regarding the trust reporting rules, any recommendations for your client to seek external advice (e.g., tax advice), and the responsibilities trustees and beneficiaries have.

This article is by Safiyya Vankalwala, Communications Counsel at LAWPRO