Tax Insights: Enhanced reporting rules for trusts and bare trusts: Trustees ─ are you ready?

In brief

Legislative amendments enacted federally in December 2022 introduced enhanced tax return filing and information reporting requirements for trusts, as well as penalties for non-compliance with these rules. The enhanced rules, which are effective for taxation years ending after December 30, 2023, will require more trusts, including “bare trust” arrangements, to file:

• a T3 “Trust Income Tax and Information Return,” and
• new Schedule 15, “Beneficial ownership information of a trust”

The first filing deadline under these enhanced rules is quickly approaching – for a trust with a December 31, 2023 taxation year end, the filing deadline is March 30, 2024 (extended to April 2, 2024, the first business day after the deadline).

This Tax Insights provides an overview of the enhanced rules, including new Schedule 15, and details on what could be considered a bare trust arrangement.

In detail

Background

The enhanced trust reporting rules¹ are intended to improve the collection of beneficial ownership information with respect to trusts to allow the Canada Revenue Agency (CRA) to better assess the tax liability, if any, for trusts and their beneficiaries. The enhanced trust reporting rules:

• create a T3 “Trust Income Tax and Information Return” filing obligation for an “express trust” (generally a trust created by a settlor during his or her lifetime or at death in a will) and bare trust arrangements (collectively “trusts”) that did not previously have a filing requirement
• require a trust to report additional information about the identity of each person who is a trustee, beneficiary or settlor of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector) on Schedule 15
• apply to certain trusts resident in Canada and non-resident trusts that are required to file a T3 return

For many trusts, the 2023 taxation year might be the first year for which these trusts have a filing requirement.

Exceptions to the enhanced rules

The following trusts are not required to file new Schedule 15, even if they are required to file a T3 return (i.e. to report income taxes payable, taxable capital gains or dispositions of capital property in the year):

• trusts that have been in existence for less than three months at the end of the year
• trusts that hold certain assets with a fair market value of up to $50,000 throughout the year (permitted holdings include money, government debt obligations and listed securities)
• lawyers’ general trust accounts²
• trusts that qualify as non-profit organizations or registered charities
• mutual fund trusts, segregated funds and master trusts
• trusts, all the units of which are listed on a designated stock exchange
• graduated rate estates
• qualified disability trusts
• employee life and health trusts
• certain government funded trusts
• trusts governed by registered plans (including registered retirement savings plans and tax‑free savings accounts), and
• cemetery care trusts and trusts governed by eligible funeral arrangements

Bare trust arrangements

The enhanced reporting rules also apply to a bare trust arrangement. Bare trust arrangements are generally not recognized as trusts for income tax purposes. Therefore, bare trusts were previously excluded from the T3 return filing requirement. Under the enhanced rules, a bare trust will now be required to file new Schedule 15 (with the T3 return), unless an exemption (see “Exceptions to the enhanced rules” above) applies, but the bare trust will otherwise continue to be disregarded for income tax purposes.

What is a bare trust arrangement?

For purposes of the trust reporting rules, “a trust includes an arrangement under which a trust 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” (commonly known as “bare trust” arrangements).

According to the CRA, a trustee can reasonably be considered to act as agent for a beneficiary when:

• the trustee has no significant powers or responsibilities and can take no action without instructions from that beneficiary, and
• the trustee’s only function is to hold legal title to the property

For the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trustee to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

Examples of bare trust arrangements

Given the broad description of what could be a bare trust, many informal trust and agency relationships may now be required to file an annual T3 return. Examples (not an exhaustive list) of situations where a T3 return (including Schedule 15) may be required by the enhanced rules include:

• Nominee legal title holder to real estate (or other property) – For probate planning, creditor protection or privacy reasons, the holder of the legal title to real estate (or other property) may be a corporation or individual acting in this capacity for the benefit of the beneficial owners of the real estate (or other property).
• Joint title holders (other than spouses) – Property to which an individual is added as a joint owner with right of survivorship for estate or other personal reasons when there is no intention for the original owner to actually gift a beneficial interest to the new joint owner (e.g. an adult child could be added as a joint holder of real estate that was originally owned by their parent for probate planning purposes, or other estate planning reasons, with the understanding that the child is not receiving their interest as a gift – i.e. the child holds their interest for the benefit of the parent, not for their personal benefit).
• “In‑trust” accounts – An account held by an entity for the benefit of another entity (e.g. a bank or investment account in the name of an individual for the benefit of a parent or a minor child); however, there is uncertainty as to how different types of “in-trust” accounts will be treated by the CRA and further guidance from the CRA is required.
• Funds/property held in escrow – As part of a commercial transaction, all or a portion of the purchase price (or other funds/property) that are held in escrow (with a law firm, an escrow agent, etc.) pending meeting specified conditions (e.g. post‑closing purchase price adjustments, obtaining approvals, issuance of regulatory or tax certificates). Exceptions may apply.  
• Partnerships – A general partner often holds legal title to certain assets of the partnership, rather than having these assets held or registered in the name of the partnership itself. It is possible that such an arrangement is a bare trust – to make a determination, the relevant legal agreements should be reviewed. If a bare trust arrangement is considered to exist, the general partner will be required to file a T3 return and Schedule 15. In this case, it is also uncertain whether the partnership itself can be reported as the beneficiary and settlor or instead whether each partner (including the ultimate partners of any other partnership that is a partner) must be reported. Accordingly, guidance from the CRA is required on how the enhanced rules will affect partnership arrangements.

Filing requirements for bare trusts

A bare trust that is required to file a T3 return and new Schedule 15 is required to register for a trust number. The CRA guidance indicates that a bare trust must complete all parts of new Schedule 15 (see below), but for the T3 return, bare trusts:

• only need to complete the “Step 1: Identification and other information” section and the last page of the T3 return (when a bare trust is not named, the CRA also provides guidance on the name a bare trust should use for the T3 return)
• can leave the remaining parts of the T3 return blank (because all the income from the trust property for a taxation year should be reported on the beneficial owner’s return of income)

Schedule 15, “Beneficial ownership information of a trust”

The enhanced trust reporting rules require trustees to report significantly more information on new Schedule 15. New Schedule 15 asks for information on all trustees, settlors, beneficiaries (including contingent beneficiaries) and controlling persons (i.e. persons who have the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust) of the trust (collectively referred to as "reportable entities"). This applies to all reportable entities that were in existence at any time during the taxation year. Disclosure of information that is subject to solicitor‑client privilege is exempt from these trust reporting requirements.

For each reportable entity of the trust, the following must be provided:

• name
• address
• date of birth (if applicable)
• country of residence for tax purposes
• tax identification number (i.e. social insurance number, business number, trust number, or the identification number assigned by a foreign jurisdiction)

Part C of Schedule 15 is required to be completed only if the above information cannot be provided because the beneficiary is unknown at the time of filing the T3 return (the CRA indicates that this could include unborn children and grandchildren, and future spouses, but does not explain how these persons could have been beneficiaries “in the year”). To ensure that the trustee will not be penalized for non-compliance (see below) as a result of omitting one or more beneficiaries from disclosure, the trustee must describe in detail under Part C, the terms of the trust that extend the class of beneficiaries to unknown entities.

Penalties for non-compliance

A new penalty applies to a trust that is subject to the enhanced disclosure rules if the trustees:

• knowingly or under circumstances amounting to gross negligence fail to file a return, make a false statement or omit required information in the return, or
• fail to comply with a demand order from the CRA to file a return

The new penalty equals the greater of:

• $2,500
• 5% of the maximum fair market value of the property held in the trust at any time in the year

This new penalty is in addition to the existing penalties (maximum $2,500) for failing to file a T3 return, which continue to apply.

Penalty relief for the 2023 taxation year (bare trusts only)

The CRA has stated that it will waive the normal late filing penalty (i.e. minimum $100, maximum $2,500) for bare trusts that file their 2023 T3 return and Schedule 15 after the April 2, 2024 filing deadline. However, the new gross negligence penalty (discussed above) may still apply.

Quebec trust reporting rules

The Quebec tax system has generally harmonized with the federal legislative amendments that introduce the new tax return filing and information reporting requirements for trusts (except for the amount of the new penalty). Effective for taxation years ending after December 30, 2023, trusts that are subject to the new enhanced rules are required to file the Quebec trust income tax return (TP-646-V), which has been updated to reflect the additional reporting of beneficial ownership information. The new Quebec reporting requirements for trusts will only apply if the trust:

• is required to file a tax return in Quebec, and
• is not on the list of exceptions, which is the same as the federal list of exceptions (see “Exceptions to the enhanced rules” above) 

The takeaway

The new trust reporting rules place a heavier burden on trustees to gather the required information from various parties, particularly in cases where a trust has not filed a T3 return in the past, and to report the information for each trustee, settlor, beneficiary and controlling person on the new Schedule 15 before the April 2, 2024 filing deadline.  

Any arrangement where beneficial ownership is separated from legal ownership should be carefully analyzed to determine if it qualifies as a bare trust arrangement. Trustees should understand these reporting obligations, review trust documents and the legislative wording to identify relevant parties and gather information where it is not readily available. Trustees should reach out to their advisers now, as determining a trust’s obligations may take a considerable amount of time, resources and expertise.

^{1. For more information on the enhanced trust reporting rules, including what constitutes a “settlor” of a trust, see our Tax Insights “New trust filing and information reporting rules are now enacted: Trustees need to be prepared.” Also, see CRA web page “New trust reporting requirements for T3 returns filed for tax years ending after December 30, 2023.”
2. In Quebec, this could also apply to a notary’s general trust accounts.}