2024: Year of the trust
New trust reporting rules, effective Jan. 1, 2024, introduce several significant changes aimed at increasing transparency and compliance in the management of trusts. These rules apply to trust taxation years ending on or after Dec. 31, 2023.
Here we highlight the new information required for filing, which trusts are impacted and statutory penalties for non‑compliance.
New information requirements 1
Trustees will have to disclose information on the following parties:
- Settlor
- Each trustee
- Any other person with the ability (through the terms of the trust or related agreement) to exert influence over trustee decisions regarding appointment of income or capital
- Each beneficiary
For each party, the trustees will have to report the following:
- Legal name
- Address
- Date of birth (for individuals)
- Jurisdiction of residence
- Tax identification number (SIN/TIN or BN, as applicable)
Which trusts must report
Express trusts
The Canada Revenue Agency (CRA) has stated an express trust is generally a trust created deliberately (with express intent) by a settlor, usually in writing. A settlor intends to set up a trust, transfers property to the trust and identifies a beneficiary/beneficiaries. Under common law, it is accepted an express trust cannot be established unless three certainties are present: the certainty of the intent to create a trust, the property to be placed in trust and the identity of the trust’s beneficiaries. This would include:
- Trusts established to own shares in a private business (family trusts)
- Trusts established to own property (including personal property)
- Spousal trusts
- Alter‑ego trusts
- Testamentary trusts which are not graduated rate estate
- Trusts deemed resident in Canada
Historically, many of these trusts would have been exempt from filing. However, the legislative change in subsection 150(1.2) states subsection 150(1.1) of the Income Tax Act shall not apply to any express trust resident or deemed resident in Canada.
Trusts exempt from filing 2
- Trusts in existence for less than three months at the end of the year
- Trusts holding less than $50,000 in assets throughout the taxation year (where the only assets held by the trust throughout the year are one or more of: cash, certain debt obligations or rights listed on a designated stock exchange, shares of the capital stock of a mutual fund corporation, units of a mutual fund trust, interests in a related segregated fund trust and interests as a beneficiary under a trust, all the units of which are listed on a designated stock exchange)
- Types of regulated trusts (such as lawyer’s general trust accounts)
- Trusts that qualify as not‑for‑profit organizations or registered charities
- Mutual fund trusts, segregated funds trusts and master trusts
- Trusts of which all units are listed on a designated stock exchange
- Graduated rate estates
- Qualified disability trusts
- Employee life and health trusts
- Registered plans including, but not limited to, deferred profit‑sharing plans, employee profit sharing plans, registered savings plans, tax‑free savings accounts and first home savings accounts
Bare trusts
Bare trusts exist where legal ownership of an asset and beneficial ownership of an asset are separate, and a trustee can reasonably be considered to act as agent for all beneficiaries under the trust with respect to all dealings of the trust’s property.
There are many situations where the existence of a bare trust should be considered, including:
- Joint ventures
- Real estate holdings (bare trustee corporations or joint ownership without change in title)
- Farm properties (land title mergers or land transfer tax planning)
- Agency agreements
- Specific lawyer trusts (funds held in trust greater than three months for a specific purpose)
- Partnership assets held in a personal name and even joint bank accounts
This list is not exhaustive, so consideration must be given to all circumstances where multiple parties may have ownership or control of an asset.
Some leniency has been granted for bare trusts. They will not be subject to late filing penalties for the 2023 tax year (gross negligence penalties could still apply).
Charitable trusts
The Charities Directorate issued guidance on filing requirements for charities administering internal trusts. Internal trusts are created when a charity receives property as a gift subject to legal conditions and holds such property as a trustee of that trust. The guidance confirmed the CRA will not require charities to file T3 returns for these trusts.
Non‑compliance penalties
Trusts will be subject to existing non‑compliance penalties for providing incomplete or inaccurate information, or not filing the prescribed form or trust return (including the new Schedule 15, Beneficial Ownership Information of a Trust).
Additionally, the administrator may be subject to harsh penalties for knowingly or – under circumstances amounting to gross negligence – making or participating in, assenting to or acquiescing in providing a false statement or omission of required information.
This additional penalty is equal to the greater of $2,500 and five per cent of the highest total fair market value of all property held by the trust in that year. It is important to consider that where a trust owns properties, significant investment portfolios or private company shares, the cost of non‑compliance will be significant.
If you have any questions or concerns regarding the new trust reporting regulations, please contact your Baker Tilly advisor.
- 1 Section 204.2 of Income Tax Regulations
- 2 Subsection 150(1.2) of the Income Tax Act
Appendix – Potential bare trust scenarios
Estate planning (investments/property)
Mr. and Mrs. A met with their advisor who suggested that to simplify the administration of their estate, their daughter, Ms. A, should be added to their property title and investment accounts. Here, Ms. A may be viewed to be acting in the capacity of a bare trustee in a bare trust arrangement, as she has legal title but no beneficial interest in the assets.
Partnership assets
Mr. A and Ms. B operate a veterinary clinic through a partnership. At the time the partnership was formed, Mr. A contributed cash and clients, while Ms. B contributed the building for the clinic and clients. As a partnership is not a legal person, it cannot hold a registered interest in a real property, so Ms. B retained legal title.
Their partnership agreement states each partner is entitled to their proportionate share in all assets, including the building. In this situation, Ms. B is viewed to maintain legal ownership of the asset, while the partnership will own the beneficial interest in the asset. This split between legal and beneficial ownership creates a bare trust arrangement.
Land title management
Mr. A owns two bordering plots of land which he and his family use for cash crops. To avoid land titles being merged, resulting in the two parcels of land becoming a single parcel, the first property is owned 100 per cent by their company, while the second property is owned 99 per cent by their company and one per cent by Mr. A.
Here, the company is the beneficial owner of both properties. The company paid for both properties, is responsible for maintenance and entitled to all proceeds on the sale of the properties. Mr. A’s one per cent ownership would be considered legal ownership, making him a bare trustee.
Specific lawyer trusts > three months
Mr. and Mrs. A were previously Canadian residents who relocated to Florida permanently in 2013. When leaving Canada, they kept their cottage in Muskoka so their children and grandchildren could use the property. In early 2023, they decided to take advantage of the favourable real estate market and sold the property for a significant gain. However, they did not receive their clearance certificate before closing, and 25 per cent of the gross purchase price was held in escrow for four months until approval was received.
In this situation, the couple’s lawyers would hold greater than $50,000 in cash in escrow for a period greater than three months. In this case, the settlor would be the purchaser, the trustee would be the lawyer/law firm and the beneficiary would be Mr. and Mrs. A.
In‑trust bank accounts
Mrs. A sold her principal residence in Toronto and downsized to a condo in Waterloo. On the advice of her investment advisor, she has taken some of the excess cash from the sale and opened in‑trust bank accounts for her grandchildren. She will deposit $75,000 into each account to earn interest until the children are 18. In this situation, Mrs. A is the settlor and trustee, while the grandchildren are the beneficiary of this account. This relationship functions like an undocumented trust.
This appendix outlines various client situations where a bare trust may exist. It is by no means exhaustive and is provided for general illustrative purposes only. It is not intended to be relied upon without consultation with a Baker Tilly advisor.
Meet the Author
Sean Grant-Young
Information is current to January 17, 2024. The information contained in this release is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.