There may be some welcome changes on the horizon for trusts, including bare trusts, regarding additional information filing requirements. The Department of Finance recently released draft legislation that proposes several adjustments to the trust reporting rules. These proposed changes include removing the requirement for bare trusts to file a “T3 Trust Income Tax and Information Return” and Schedule 15, “Beneficial Ownership Information of a Trust,” for the 2024 tax year. Additionally, the draft legislation expands various exceptions to provide relief for certain other trusts. However, it also introduces new rules that will deem specific arrangements as express trusts, making them subject to reporting requirements beginning in the 2025 tax year.
Taxpayers are encouraged to review these proposed changes to understand how their trust reporting obligations might be affected for the 2024 and subsequent tax years. The Department of Finance is accepting comments on the draft legislation until September 11, 2024.
The enhanced trust reporting measures were first announced in the 2018 federal budget, requiring more trusts to file an annual T3 return and disclose additional information about trustees, beneficiaries, settlors, and controlling persons. These rules, which took effect for tax years ending after December 30, 2023, apply broadly to Canadian-resident express trusts, certain civil law trusts, and non-resident trusts required to file a T3 return, including bare trusts under the current legislation.
In March 2024, the Canada Revenue Agency (CRA) provided temporary relief by announcing that bare trusts would not need to meet these reporting obligations for the 2023 tax year unless directly requested by the CRA. The CRA also indicated that it would work with the Department of Finance to clarify the public guidance on this requirement.
Proposed Changes for the 2024 Tax Year
The draft legislation introduces several important changes that narrow the scope of the filing requirements for tax years ending after December 30, 2024. Key proposals include:
Bare Trusts: The filing obligation for bare trusts is proposed to be removed for the 2024 tax year. However, a new, narrower definition will apply for the 2025 tax year and beyond.
Small Trusts: A broader exemption is proposed for “small trusts” that own property with a total value not exceeding $50,000 throughout the tax year. Under the current rules, only specific types of small trusts with assets such as cash, publicly traded shares, or mutual fund units are exempt. The proposed change expands this exception to all small trusts.
Related Party Trusts: A new exemption is introduced for “related party” trusts. To qualify, each trustee and beneficiary must be individuals, and the trust’s property value must not exceed $250,000 during the tax year. The types of allowable assets under this exception are similar to those for small trusts but also include additional items such as certain guaranteed investment certificates (GICs), public company debt obligations, and personal use properties.
Regulated Trust Accounts: The draft legislation expands the exclusion for certain regulated trust accounts, such as lawyer trust accounts, where the account consists only of cash and does not exceed $250,000 at any time during the year. Even if maintained as a separate trust for a particular client, these accounts will not be subject to reporting under the proposed changes.
Statutory Trusts: A new exception is proposed for trusts established to comply with federal or provincial statutes requiring trustees to hold property in trust for a specific purpose.
New Deemed Trust Definition for 2025 and Beyond
Starting with the 2025 tax year, a new definition for deemed trusts is proposed. This definition would include any arrangement where:
- One or more persons hold legal ownership of property for the benefit of others.
- The legal owner can reasonably be considered to act as an agent for the beneficiaries.
Under this arrangement, the legal owner is deemed to be the trustee, and those benefiting from the property are deemed to be beneficiaries. There are several exceptions to this rule, including situations where:
- All legal owners are also deemed beneficiaries.
- The property held is a principal residence.
- The property is held pursuant to a court order or by a publicly traded corporation.
These changes should significantly reduce the number of trusts required to meet the additional reporting requirements for 2024 and subsequent years. However, it’s important for trustees to carefully review the new exceptions to determine their eligibility. For example, a trust with an unrelated trustee (such as a family friend) might not qualify for the related party exemption. In some cases, it may be possible to make adjustments, such as changing the trustee, but the implications of such changes should be considered carefully.
What This Means for You
The proposed changes provide significant relief for many trusts, particularly bare trusts, by reducing the burden of additional reporting requirements. However, the rules are still complex, and determining whether your trust qualifies for an exemption requires careful consideration.
At ClearWealth Accounting Advisors, we are here to help you navigate these changes and ensure your trust complies with the new regulations. If you have questions about how these changes might impact your reporting obligations, contact our team of experts today. We can provide the guidance you need to manage your trusts effectively in light of the evolving tax landscape.
