Does the new Canadian trust tax reporting apply to you?

As is often the case with new tax regulations, there are a host of things to consider, and some exceptions may apply. It’s best to check with your accountant or tax advisor to confirm if, and how, you could be affected. However, here are some highlights of these changes which may be useful in steering your conversation with them.

What’s new?

You are now required to file an annual Trust Income Tax Return for many trusts, including bare trusts and foreign/non-resident trusts, which previously was not required. You must also submit additional trust information for all trust types.

These rules apply to the taxation year ending on or after December 31, 2023. The filing deadline for Trust Returns is March 30, 2024 (as this is a Saturday, the deadline is deferred to April 2, 2024). Failure to report could result in significant uncapped penalties.

The Trust Return includes new reporting requirements on the beneficial ownership of the trust. Extensive details on settlors, beneficiaries, trustees, and other controlling persons will need to be provided when filing the return.

What’s a bare trust, and do these changes apply to you?

A bare trust can be considered to act as agent for its beneficiaries with respect to all dealings in all the trust’s property. In a bare trust arrangement, the beneficiary has total control over, and rights to, the assets and income derived from these assets. The trustee holds the assets on behalf of the beneficiary and is responsible for managing the trust assets under direction of the beneficiary. The trustee does not make decisions on distribution of the trust’s assets and income. A formal trust document is not needed for a bare trust.

Common examples of bare trusts that fall under the new reporting rules are:

• Joint accounts with administrative / estate planning purposes with assets over $50,000¹
• “In trust for” accounts (typically held and managed by an adult family member on behalf of a minor) with assets over $50,000¹
• Real property with an on-title owner who is not a beneficial owner (co-signed mortgages)
• Trusts that hold non-income producing property

Some exemptions to filing the Trust Return include, but are not limited to:

• Trusts that have existed for less than three months at the end of the year
• Have less than $50,000 in cash or near-cash¹
• Some estates (e.g., graduated rate estates)

¹ Note that certain informal bare trusts could still be subject to this filing obligation even if trust assets are under a Fair Market Value (FMV) of $50,000, depending on the type of assets held in the trust. Other conditions may also apply. Consult with your personal tax advisor to determine if this applies to you.

How are foreign or non-resident trusts affected?

These trusts are considered resident and taxable in Canada where the trust receives a contribution from a former Canadian resident (either within five years of leaving Canada or within five years before returning to Canada), and has a Canadian resident beneficiary. Previously, filing a Trust Return was not mandatory unless one carried on a business in Canada, had taxable income in Canada and was deemed a Canadian resident, or they disposed of taxable property in Canada.

Foreign trusts that meet one or more of these conditions may now have to file a Trust Return:

• The beneficiary of the trust is a Canadian resident
• They hold taxable Canadian property
• A Canadian resident loaned or transferred property to the trust
• Business was carried out in Canada

Failure to report – filing penalties

The Canada Revenue Agency (CRA) is waiving the late filing penalty for the 2023 year for bare trusts only as this is considered a transition year. Failure to file the Trust Return for bare trusts going forward, and for foreign trusts both this year and beyond, can result in significant penalties.

• The current penalty for not filing a Trust Return will continue, which is $25/day with a minimum penalty of $100 and a maximum of $2,500.
• The new rules also impose an additional gross negligence penalty where a failure to file the return was made knowingly or due to gross negligence. The additional penalty in this situation would be the greater of $2,500 or 5% of the FMV of trust property in the year.
• The trustee would be responsible for the CRA penalty assessed against the trust.
• For Quebec-based taxpayers, Revenu Québec proposes a penalty of $1,000, plus $100 per day until the return is filed, to a maximum of $5,000.

What action should you take?

Carefully review your trust arrangements as soon as possible with your accountant or tax advisor to determine if the new reporting requirements apply to you. If they do, you’ll need to obtain a trust account number (required to eFile a Trust Return) online via CRA’s MyAccount, MyBusiness Account, or Represent a Client.

You will also need to provide details on the trust, including the trust type, trust name and primary trustee information with supporting trust documents (signed trust, last will and testament).

Further information is available on the CRA’s website page for New Trust Reporting Requirements. And, of course, your Private Wealth Advisor would be happy to assist with resources as needed.

Source: Canada Revenue Agency (CRA)

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