Under the current rules, a trust resident in Canada is generally not required to file an annual T3 income tax return unless the tax is payable by the trust for the year or the trust disposes of capital property.
Under the new tax rules, for tax year December 31, 2022, and later years, most personal trust residents in Canada will now be required to file an annual return even where there is no income tax liability, and the trust made no distributions or allocations during the year.
A bare trust is an arrangement where the trustee of the trust holds title to the property as an agent for its beneficiaries. When a personal rental real estate property is transferred to a holding company, very often, the beneficial ownership of real property is only transferred to the holding company under a bare trust agreement, and the legal title is continued to be held personally. A tax return will now have to be filed for such bare trusts.
Some types of trusts are still exempt from the new trust reporting rules, including:
- trusts that have existed for less than three months,
- trusts that hold less than $50,000 in assets throughout the tax year (as long as they only hold deposits, government debt obligations and listed securities),
- Other specifically exempted trusts
Additional information reporting
The current prescribed T3 forms and schedules require only limited information regarding the parties to the trust. Under the new regulations, every trust that must file a T3 return must disclose information which includes the name, address, date of birth, jurisdiction of residence and SIN, business number, trust account number or foreign TIN for each
- trustee,
- beneficiary,
- settlor and,
- each person who has 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
A trust would be considered to have met the reporting requirements if it provides this information for each trust beneficiary whose identity is known or ascertainable, with a reasonable effort at the time of filing. For beneficiaries whose identities are not known or ascertainable, a trust can comply by supplying sufficiently detailed information on the T3 return to determine with certainty whether any particular person is a beneficiary.
Non – compliance penalties
The current penalty of $25 for each day late, with a minimum penalty of $100 and a maximum of $2,500 for not filing a T3 return when required, will continue to apply. It will now also apply if the required additional information (as discussed above) is not included in the return.
The new rules also impose a significant additional gross negligence penalty where a failure to file the return was made knowingly or due to gross negligence. The additional penalty would be 5 % of the maximum value of property held by the trust during the relevant year, with a minimum penalty of $2,500.
Takeaways
If you are unsure if the legal title of your real estate holdings is with the holding company or if a bare trust was set up just to transfer the beneficial ownership to the holding company, please contact your legal advisor to confirm. If you are aware of any non-active trusts or other trusts that were set up during a transaction for which we have not been filing tax returns, please contact Provision to discuss this.
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