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Wendy Seet

Wendy Seet

Tax Principal at Manning Elliott Burnaby
Tax
September 10, 2024

Update to Trust Reporting Requirements (Part 2)

Changes over the last few years have expanded trust reporting requirements under the Income Tax Act (the Act) and created significant challenges for taxpayers including charities and not-for-profit organizations (NPOs) across Canada:

  • The 2018 budget introduced enhanced trust reporting requirements (see New Trust Reporting Requirements)
  • Bill C-32 and the Fall Economic Statement Implementation Act, 2022, enacted legislation to take effect starting in the December 31, 2023 taxation year (see Update to Trust Reporting Requirements).
  • The Canada Revenue Agency (CRA) clarified on November 10, 2023, that it would not require registered charities to file trust returns (T3s) for their internal trusts.
  • The CRA provided last-minute temporary relief on March 28, 2024, removing the requirement for bare trusts to file T3 returns for the 2023 tax year (unless a direct request is made by the CRA), and advised that further guidance would be forthcoming.

This further guidance has arrived in the form of  proposed draft legislation released by the Department of Finance on August 12, 2024.

Exemptions

In addition to extending the filing exemption for all bare trusts for another year to include the 2024 taxation year, it also adds or expands on a number of trusts that are exempt from filing T3 returns:

  1. Bare Trust Exemptions:  The draft legislation operates in a somewhat convoluted way, but attempts to differentiate bare trusts from express trusts. It first deems a bare trust arrangement to be an express trust, the legal owner of property in the arrangement to be a trustee, and the person or partnership who has the use of or benefits from the property to be the beneficiary. It then provides a list of arrangements that would not be subject to this deeming rule beginning in the December 31, 2025 taxation year: [i]
    1. Where each beneficiary is also a legal owner and all legal owners are beneficiaries. This includes joint bank accounts, and could also include internal trusts of charities and NPOs (endowments, scholarships and building funds), depending on the terms of the arrangement.
    2. Where one or more legal owners of real property could designate it as a principal residence, and the legal owners are related individuals. For example, when a parent is on title with a child to assist that child in obtaining a mortgage, or a parent has added a child to title for estate planning purposes.
    3. Where the legal owner of real property could designate it as a principal residence, and is an individual holding the property for the use or benefit of their spouse or common-law partner. This includes when only one spouse or common-law partner is on title of a family home.
    4. Where a general partner holds property for the use or benefit of the partnership.
    5. Where the legal owner holds property pursuant to a court order.
    6. Where Canadian resource property is held for the use or benefit of one or more publicly listed companies.
    7. Where a tax-exempt person holds funds that it has received from the Crown exclusively for the use or benefit of other tax-exempt persons. This includes charities or NPOs managing funds received from federal or provincial governments for the benefit of other charities or NPOs.

It is important to note that these exemptions are only available to bare trust arrangements that are deemed to be express trusts, but not express trusts in and of themselves. Express trusts are not defined in the Act but the CRA has described them as “… a trust created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provision of a statute).” [ii] This may exclude bare trust arrangements that are documented and do not meet other exemptions (some of these are noted below).

  1. Charity Exemption: The requirement for a charity to be a corporation has been removed, so that any registered charity regardless of its form is now exempted from filing T3 returns.[iii]
  1. Value Exemptions: [iv]
    1. The list of specific assets that must be held by a trust in order to avail of the $50,000 value limit has been removed. The effect is that trusts holding assets with a fair market value not exceeding $50,000 are exempt from filing T3 returns, regardless of the type of assets it holds.
    2. A higher $250,000 fair market value limit has been added for trusts holding assets that comprise of an expanded list of assets, where each beneficiary is an individual and is related to each trustee who is also an individual. The list of assets include money, GICs, publicly listed debt or shares, and – notably, the addition of – personal use property.
    3. The T3 filing exception for general trust accounts holding funds pursuant to “rules of professional conduct or the laws of Canada or a province” has now been extended to specific client trust accounts that do not exceed a value of $250,000.

Definition of Settlor

The previously broad definition has been narrowed to refer to persons who have directly or indirectly transferred property to the trust without receiving fair market value consideration. This will provide more certainty for trusts required to disclose additional information under the new rules.

What’s Next

Further changes may be expected as the legislation is still in draft form. While the proposed legislation offers additional relief, taxpayers must still be cautious to understand the legislation and how it relates to specific arrangements that they have undertaken. Where there is uncertainty, we recommend seeking professional guidance.

 

Manning Elliott LLP posts new blog articles regularly with up to date information on taxation changes by the federal and provincial governments.

NOTE: Federal and provincial tax laws are complex and are subject to frequent changes. Information contained in this Manning Elliott blog is not intended to represent legal or tax advice. Please consult with your tax adviser before employing any strategies based on the information discussed within this article.

[i] Revised subsection 150(1.3) and new subsection (1.31).

[ii] https://www.canada.ca/en/revenue-agency/services/tax/trust-administrators/t3-return/new-trust-reporting-requirements-t3-filed-tax-years-ending-december-2023.html#toc1

[iii] Paragraph 150(1.1)(a).

[iv] Paragraphs 150(1.2)(b), new (b.1), and (c).