Golombek: What you need to know about the new trust reportin…

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You can be forgiven if you missed the latest development in the ongoing saga of the new trust reporting rules, especially If you’ve been away over the summer.

Fortunately, the news is good since it seems to provide permanent relief for many Canadians who may have otherwise been required to file a T3 trust income tax and information returns for what are commonly referred to as “bare trust” arrangements.

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A bare trust exists when a trustee’s only role is to follow the instructions of the beneficiary. Bare trusts can potentially be used for nefarious tax purposes, but they’re most often used for real estate ownership, to protect confidentiality and for probate planning.

Various arrangements, such as when a child is added to a parent’s joint bank or investment account “for estate planning purposes only,” or a parent goes on the title of residential real estate so their child can qualify for a mortgage, could potentially be considered a bare trust arrangement and be caught by the new reporting rules.

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Before delving into the new relief measures announced in the draft legislation released in August, let’s review the history of the new reporting rules, which can be traced back to 2018.

Before these new changes, a trust was only required to file a T3 return if income tax was payable by the trust for the year, or if the trust had either a capital gain or disposed of capital property in the year. But expanded trust reporting rules originally proposed in the 2018 federal budget were supposed to change that as of the 2021 tax year.

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The goal of the new reporting, according to the Canada Revenue Agency, was “to improve the collection of beneficial ownership information with respect to trusts and to help the … CRA assess the tax liability to trusts and its beneficiaries.”

Under the revised reporting rules, the T3 return would have to disclose detailed information to the CRA, such as the name, address, date of birth, residency and social insurance number for each trustee, beneficiary or settlor of the trust.

The effective date for the new T3 reporting rules was postponed twice, and legislation to effect the changes was finally passed in late 2022 and was to be effective for the 2023 tax year. This meant that various trusts, including so-called bare trust arrangements, would have potentially needed to file a T3 return for the first time 90 days after Dec. 31, 2023.

As the April 2, 2024, filing deadline approached, however, many Canadians panicked about their need to file this complex return and the associated costs, and sought advice from their tax advisers, who suggested that these bare trust type of arrangements would indeed need to file T3 returns.

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Much lobbying ensued, and the CRA in mid-March 2024 announced it would not be assessing gross-negligence penalties for failing to file a 2023 T3 return for bare trusts other than in “egregious” cases.

The lobbying continued unabated, and on March 28, 2024, just days before the deadline, the CRA exempted all bare trusts from filing T3 returns for 2023 unless the agency specifically requested the trust to file. The CRA’s position was taken “in recognition that the new reporting requirements for bare trusts have had an unintended impact on Canadians.” Prior to this announcement, many trustees of bare trusts had filed T3s based on the rules originally announced for the 2023 taxation year.

In July 2024, François Boileau, the Taxpayers’ Ombudsperson, formally opened a systemic examination into whether the CRA respected taxpayers’ rights in administering the bare trust filing requirements for the 2023 tax year.

The examination is looking into whether the CRA respected service rights outlined in the Taxpayer Bill of Rights, including: “You have the right to complete, accurate, clear, and timely information,” and “You have the right to have the costs of compliance taken into account when administering tax legislation.”

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The examination was in response to various bare trustees who had already paid their representatives hundreds of dollars in order to meet 2023 filing obligations that were ultimately waived by the CRA.

The new draft legislation released last month clarified the rules. First, the new rules won’t apply to personal trusts that have been in existence for less than three months. They also don’t apply if the fair market value of the property in the trust is $50,000 or less throughout the year.

Finally, T3 returns won’t be required for trusts where all the trustees and beneficiaries are individuals and are related to each other if the fair market value of the property in the trust is $250,000 or less throughout the year, as long as the trust property consists of money, guaranteed investment certificates, mutual funds, exchange traded funds, listed shares or debt, or certain government debt.

These exempt trusts, however, will still have to file a T3 return if they have tax payable, a capital gain or have disposed of capital property in the year. They are not, however, required to provide the additional information that non-exempt trusts are required to provide on the T3 about their beneficiaries.

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The legislation also confirmed that bare trusts are not required to file a T3 for the 2024 taxation year. In 2025 and subsequent years, some bare trusts may be required to file, with several exceptions.

First, there’s no requirement to file when a principal residence is held by legal owners who are related, such as when a parent goes on a property’s title along with their child to assist the child in obtaining mortgage financing.

In addition, no T3 return will be required when all the legal owners of the property are also beneficial owners, such as when a joint account is held by family members. And many so-called bare trust arrangements between adults and kids will likely be exempt, too, as they are below the general $250,000 threshold.

The first reporting deadline for bare trusts will be March 31, 2026.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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