Expanded Trust Reporting
Rules
federal government recently introduced new rules that increase the reporting
requirements for trusts and trust-like relationships. These rules are effective for 2023. The new rules are meant to apply broadly and
will significantly increase both the information being provided by trusts and
the number of trusts that are required to file returns. In particular, the new expanded rules will
require bare trust arrangements to file trust returns. These arrangements have previously not been
required to file returns.
What
is a bare trust?
Bare
trust arrangements are very common and many people who have entered into such
arrangements may not even realize that they are in a bare trust. A bare trust arrangement exists where the
legal ownership is different from the beneficial ownership. In simple terms, a legal owner is one
who is listed on the title of the asset.
For example, someone who is on title at land registries or whose name is
on a bank account or investment portfolio.
The beneficial owner of an asset is the person who has true ownership
of the asset in that they are entitled to the benefits of ownership and have
assumed the costs and the risks of ownership. For example, who would be
entitled to the proceeds if the asset is sold and who is responsible for the
costs of maintaining the property or would bear the cost of a lost or damaged
property.
Bare
trust arrangements are very common and often there is no written agreement that
outlines the terms of the arrangement.
Some common examples of bare trust arrangements are as follows:
Individual
and Estate Planning reasons:
–
Bank accounts
opened for minors often have an adult listed on the account (ie Mr John Smith
ITF Jane Smith, in this case the ITF literally means “in trust for”).
–
Parents will
sometimes put their child’s name on title for their home or on a bank account
for estate planning purposes.
–
A parent’s name
may be on title on the child’s house in order to assist the child in obtaining
a mortgage.
Business reasons:
–
Shareholder on
title for real estate or vehicles owned by a corporation.
–
One partner
holding title to real estate on behalf of a partnership or joint venture.
–
One corporation
on title to an asset owned by a different corporation.
In addition, certain industries require their members
to hold assets in trust for their clients, ie lawyers or realtors. There are exceptions to these rules that
exclude a lawyer’s general trust account, but accounts held for specific
clients or groups are not excluded.
Are there any exceptions?
In the event that a bare trust arrangement exists
there are a few exclusions to the filing obligations that exempt certain trust
arrangements from the disclosure requirements:
–
Trusts that have
been in existence for less than 3 months at the end of the year.
–
Trusts where the
total value of the assets held is less than $50,000 at all times during the
year and the assets consist of cash and certain (but not all) publicly listed
securities.
–
Registered
charities and non-profit clubs, societies and associations.
What
information needs to be reported?
Where
a trust is required to file a return, it will need to identify the following
persons:
–
The settlor(s) –
the original owner of the property.
–
The trustee(s) –
the title holder/legal owner of the property.
–
The beneficiaries
– the beneficial owner/party that benefits from the ownership of the property.
–
Anyone with the
ability to exert influence over trustee decisions.
For each of the identified parties, the trust will
need to disclose the following information:
–
Name
–
Address
–
Date of birth (if
applicable)
–
Country of
residence
–
Tax
identification number (ie social insurance number or business number)
The filing obligation with respect to a trust is the responsibility of
the trustee. Returns for calendar 2023
are due by April 2, 2024.
These
disclosure requirements also apply to most existing trusts and estates. In the past, if the trust did not have
activity, it could avoid filing a return.
This exception is no longer available and trusts will need to file
returns which include the new Schedule 15 reporting the above information.
What
if I miss filing the return?
If
the return is not filed on time, it will result in a penalty of $25/day to a
maximum $2,500 in addition to penalties on any unpaid taxes. The Canada Revenue Agency has the ability to
apply new gross negligence penalties in the amount of the greater of $2,500 and
5%of the highest fair value of the trust’s property during the year. CRA has indicated that they will waive the
failure to file penalty for the 2023 year end for bare trusts where the filing
was made after the deadline of April 2, 2024.
This waiver of penalties will not apply to the gross negligence penalty
or if the trustee was aware of the filing requirement and knowingly filed late
or missed entirely the filing obligation.
The failure to regularly file trust returns in bare trust situations may
also result in future negative tax consequences such as income being taxed in
the hands of the legal owner or the denial of principal residence exemption
claims.
These rules are complex and if disclosure is required, the information
required may take time to obtain. If you
believe that you are in a bare trust arrangement and that a return may be
required, please contact your Daye & Partners representative so we can
assist you.