New trust reporting rules and implications for in-trust-for (ITF) accounts

In an effort to counter tax avoidance and assess tax liability for trusts, new tax return filing and reporting requirements that were initially introduced in Budget 2018 will apply for trusts with tax year end after December 30, 2023.

Previously, trusts only had to submit a T3 trust income tax and information return (T3 return) under specific circumstances, such as when the trust owed taxes, sold a capital property, or had a taxable capital gain. Additionally, a trust might also need to file a T3 return if it received income, gain, or profit from the trust property that is assigned to one or more beneficiaries. In these cases, the trust should file a T3 return if its total income from all sources is over $500, if it has more than $100 of income allocated to a single beneficiary, or if it made a distribution of capital to one or more beneficiaries.

The new rules expand the scope of trusts that need to file an annual T3 trust return and impose additional disclosure requirements on details of the trustees and beneficiaries. The impacted trusts are express trusts, bare trusts, and, for civil law purposes, a trust that is other than a trust established by law or by judgement. An express trust is a form of trust that is established with a clear and deliberate intention on the part of the settlor, usually through a trust agreement or a testamentary document.

Under the new rules, all trusts are required to file an annual T3 trust return, with limited exceptions. This means many trusts that did not have to file previously are now required to file an annual T3 return, including a “bare trust” (further discussed below). In addition, unless the trust is considered a “listed trust” (defined below), every trust that is required to file a T3 return is now required (under new section 204.2 of the Income Tax Regulations) to provide additional beneficial ownership information by completing the new Schedule 15, Beneficial ownership information of a trust, which is a part of the T3 return package. Schedule 15 requires the applicable trusts to report the identity of the settlor(s), trustee(s), beneficiary(ies), and anyone who can influence the trustee's decision-making with regard to income or capital allocation. Information such as names, addresses, dates of birth, jurisdiction of residence, and taxpayer identification numbers (TINs) must also be provided for each of these parties. The T3 return, along with Schedule 15 (if applicable), must be filed within 90 days after the end of the trust's tax year.

A penalty will apply if a trust must file a T3 return (including the Schedule 15 beneficial ownership schedule) but fails to do so. The penalty will be equal to $25 for each day of delinquency (with a minimum penalty of $100), up to a maximum penalty of $2,500. Furthermore, if a failure to file the return was made either knowingly or due to gross negligence, an additional penalty will apply. The additional penalty will be equal to 5% of the maximum fair market value (FMV) of the property of the trust, with a minimum penalty of $2,500.

Exceptions from the new trust reporting rules (i.e., listed trusts)

Certain types of trusts, known as “listed trusts,” are excluded from these additional reporting requirements, including the following:

• Trusts that have been in existence for less than three months at the end of the year;
• Trusts that hold assets with a total FMV that does not exceed $50,000 throughout the year if the only assets held by the trust throughout the year are one or more of:
  • Money (Money does not include collectible gold or silver coins, or gold or silver bars),
  • Certain government debt obligations,
  • A share, debt obligation or right listed on a designated stock exchange,
  • A share of the capital stock of a mutual fund corporation,
  • A unit of a mutual fund trust,
  • An interest in a related segregated fund,
  • An interest, as a beneficiary under a trust, that is listed on a designated stock exchange.
• Trusts that qualify as non-profit organizations or registered charities;
• Mutual fund trusts, segregated fund trusts, or master trusts;
• A trust where all of the units are listed on a designated stock exchange;
• Graduated rate estates;
• Qualified disability trusts;
• Employee life and health trusts;
• Certain government-funded trusts;
• Trusts under or governed by a deferred profit sharing plan (DPSP), pooled registered pension plan (PRPP), registered disability savings plan (RDSP), registered education savings plan (RESP), registered pension plan (RPP), registered retirement income fund (RRIF), registered retirement savings plan (RRSP), tax-free savings account (TFSA), employee profit sharing plan (EPSP), registered supplementary unemployment benefit plan (SUB), or first time home saving account (FHSA); and
• Cemetery care trusts and trusts governed by eligible funeral arrangements.

For clarity, most commercially available mutual fund trusts, corporations and exchange-traded funds (ETFs) will be exempt from the enhanced trust beneficiary filing requirements.

To illustrate the application of the new rules, assume that XYZ family trust holds assets consisting of units of a mutual fund trust with an FMV less than $30,000 throughout the taxation year ending December 31, 2023, and earned $1,000 in interest income during the year which was retained in the trust. In this example, XYZ family trust is considered a listed trust and, therefore, does not need to include Schedule 15 under the new reporting requirements. However, the trust would still be required to file a T3 return because it received more than $500 in income during the taxation year. Assuming the value of the mutual fund trust was indeed worth over $50,000 at any point in the year, then XYZ family trust would need to file the enhanced beneficiary reporting information via Schedule 15 with its T3 trust return. 

In-trust-for (ITF) accounts

In general, ITF accounts are “informal trusts” that are set up to invest funds on behalf of a minor. Under contract law, minors do not have the legal capacity to enter into a binding contract to purchase financial instruments in their own name. ITF accounts can grant minor beneficiaries access to otherwise inaccessible investment opportunities. When a donor settles property into a trust, the individual “divests, deprives, and dispossesses” of the property. This generally indicates that the beneficial ownership of the property has changed since the beneficiary has effectively become the new owner. Unlike formal trusts, informal trusts are generally not supported by legal documentation, such as a trust deed documenting the parameters of the trust.

If an in-trust-for (ITF) account is considered a valid trust, it is our understanding that it would fall within the scope of the new trust reporting rules. A T3 return, along with Schedule 15, should be filed for the trust unless the trust falls under one of the exceptions above. If the ITF account is classified as otherwise, it likely would not be subject to the new trust reporting requirements.

For a trust to be considered valid, three certainties must exist, which may or may not be formally documented. The first is the certainty of intention, which refers to the certainty of the donor’s absolute intention to settle the property into the trust. The second certainty – certainty of subject matter - requires that the property itself being donated is known with absolute certainty. The third certainty – certainty of objects – refers to the beneficial owner (i.e., beneficiary) of the property; they must be defined clearly. A valid trust exists when all three of these certainties are clear and present. It is a question of fact whether all three certainties exist and whether a valid trust exists. The determination is made on a case-by-case basis. In addition, the trust must not violate any legal or public policies in order to be considered valid (e.g., must not be created to defeat creditors in the event of, or on the eve of, bankruptcy).

If the evidence does not indicate the existence of a valid trust, the Canada Revenue Agency (CRA) may consider the ITF account an agency arrangement, a gift, or an arrangement of some other nature. As ITF accounts come with inherent uncertainties, their tax implications, which follow the nature of the arrangement, also contain uncertainties.

Due to the complex nature of trust arrangements, it is recommended that legal counsel be sought when approaching the topic of trusts to help ensure the settlor’s intentions for the trust are properly documented, executed, and satisfied. An accountant may also be consulted to determine the suitability of using informal and/or formal trusts to achieve an individual’s financial objectives.

Due to uncertainties associated with ITF accounts, it is important to seek the guidance of a qualified accountant where necessary to determine the impact of the 2023 trust reporting requirements on client(s) who hold ITF accounts.

Bare trusts

A bare trust (sometimes referred to as a “naked trust”), although not defined in the Income Tax Act (Canada), generally refers to a trust where the trustee has legal ownership of the property but has no other duties, obligations, and responsibilities with respect to the property as trustee. The trustee’s only function is to hold legal title to the property. In essence, a bare trust is a principal-agent relationship, which means that the trustee can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all trust’s properties.

Bare trusts are specifically included in the new trust reporting rules. However, a recent tax tip from the CRA, dated March 28, 2024, provided relief for bare trusts from the obligation to file a T3 return, including Schedule 15, for the 2023 tax year unless expressly requested by the CRA. It is important to note that this proactive exemption applies exclusively to bare trusts, and it appears to apply only for the 2023 tax year. The CRA has stated that it will work with the Department of Finance to further clarify its guidance on filing requirements and that it will communicate with Canadians as further information becomes available.

The broad definition of bare trusts could capture a wide range of arrangements under the new rules, including the following:

• Co-signing on a mortgage: Consider a situation where an adult child acquires a home, and the parents co-sign the mortgage. There are generally two ways in which a co-signer can take shape: the co-signer may become a “co-borrower” or a “guarantor”. 
  • Where the co-signer is a “co-borrower”, they are placed on the legal title of the home and are equally responsible for the debt if the mortgage goes into default. As the parents take on legal ownership while the beneficial ownership lies with the child, we understand the parents would generally be considered the trustees of a bare trust.
  • In contrast, a “guarantor” situation arises where the co-signing parent is not put on title to the home but rather assumes the role of backing the loan and vouching that the applicant will pay it back on time. The guarantor will be responsible for the loan if it goes into default. As there is no legal ownership taken by the parent, it is our understanding that no bare trust exists for a “guarantor” situation. 
• Joint ownership of property: An owner of a joint account or residential property may want to add a family member to the title of the account or residential property without extending beneficial interest for the purpose of avoiding probate or simplifying estate administration. For example, if an elderly parent adds an adult child as an owner of a residential property (without transferring any beneficial interest) so that when the parent passes away, the adult child can acquire the property immediately. In this case, the adult child would generally be considered the trustee of the trust.
• Joint ventures/partnerships: An individual may hold the legal title of a property on behalf of a group of owners in a joint venture or partnership. In this scenario, the individual may be considered the trustee of the bare trust.

The issue with bare trusts is that they do not need specific documents or paperwork to be formally established. In some situations, bare trusts can be created inadvertently. This lack of formality can make many Canadians, especially those without access to advanced tax advice, unaware of the need to file a Schedule 15 and T3 return. We also note that confusion may arise in situations due to the broad definition of bare trust and the limited official guidance currently available. We are hoping that more guidance will be released by the Canada Revenue Agency (CRA) in the future. Given the nuanced nature of bare trusts and the potential for individuals to overlook their reporting obligations, seeking tax advice may be an important step for Canadians to take when dealing with the new trust reporting rules.