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New Trust Reporting Rules May Impact Retirees

The CRA has introduced new tax rules that take effect for your 2023 tax filings.  The most significant changes come in the area of trust reporting.  You may be thinking to yourself “I am not a trustee or a beneficiary of a trust, so I have nothing to worry about”.  Not so fast.  The new rules may put requirements on far more Canadians than most people realize.  The impact of non-compliance can be significant fines and penalties, so you want to make sure that you remain on the right side of things with the CRA.

In this video I am going to walk through  what the new trust reporting rules are, specifically focused on situations that a retiree or soon-to-be retiree may encounter.  I will explain what your obligations are, exemptions, deadlines, potential penalties, and steps you can take to keep you tax compliant this upcoming tax season.

And, if we haven’t met yet, my name is Mark Walhout.  I run a financial planning and investment advisory business called Walhout Financial.  I help people with retirement and I created this channel to share ideas and concepts that I am using to help people with retirement every day.  If you want to get more videos like these consider subscribing to the channel and hitting the bell icon so that you are alerted when new videos are posted.

Why New Trust Reporting Rules?

So the first question you may be asking is, why is the CRA adding new trust reporting requirements?  The official stance of the government when they announced these measures back in 2018 was that they wanted to help combat “aggressive tax avoidance, tax evasion, money laundering and other criminal activities” 

Under the previous rules, only trusts that had taxes payable at the end of the year needed to file an annual trust tax return (known as a T3).

Under the new rules, all affected trusts need to file a T3 return even if they don’t have taxes owing.  In addition, they must also disclose all beneficiaries settlors and/or protectors of the trust, including their addresses, date of birth and taxpayer identification number, such as a social insurance number.

Then, in 2022, the CRA announced that the new trust reporting rules would apply not only to express trusts (express intention, property, and beneficiaries) but also to bare trusts.  Bare trusts are not defined in the Act. Generally an arrangement where the trustee is simply holding legal title to the beneficiary’s property and has no powers without the consent of the beneficiaries.

This opens up a whole new can of worms.

This will create a lot of additional work for trustees.

What Constitutes a Trust for the Purposes of the New Trust Reporting Rules?

This is where things may get complicated.  Those who are trustees or beneficiaries of a formal express trust may have an easier time self-identifying tThat they have responsibilities under the new rules.  But, the definition of what constitutes a trust is open to interpretation and there are several scenarios that I believe will be considered in the eyes of the CRA to constitute trusts and may put a number of retirees in the crosshairs of the CRA if they are not careful about meeting their compliance obligations.  Now I am going to outline some common retiree scenarios where a trust may be used and be subject to the new reporting rules - both obvious and not-so-obvious

We will start with the obvious ones:

  • Family Trust set up to own the family cottage - used to pass cottage to next generation while alive but maintain some control
  • Alter-Ego trust - used as a living will and will substitute for those over the age of 65 (privacy, estate efficiency, possible creditor protection, professional management)
  • Spousal Trust - similar to alter ego but used by two spouses who are over age 65
  • Testamentary Trust - a loved one passed away and left you assets in a trust that you are receiving regular payments from (or you are a trustee of)

Less obvious ones that we now need to watch out for:

  • Parents who are on the deeds to their kids’ houses at 1% - this is considered a bare trust and you will need to report this on a T3 tax return

Bare trusts are not defined in the Act. Generally an arrangement where the trustee is simply holding legal title to the beneficiary’s property and has no powers without the consent of the beneficiaries.

  • Those with older parents who were added to the deed of their parents’ homes to ease estate administration - this is also considered a bare trust and you will need to report this on a T3 return
  • An In-Trust-Account set up for a child or grandchild - this would necessitate a T3 return
  • Certain trusts set up by lawyers to facilitate financial transactions - ie. a deposit given to a lawyer for the purchase of a property, if it’s not held in the lawyer’s general trust account, may constitute a bare trust and have reporting requirements

What types of trusts/situations are exempt from the new rules?

While you may now be a bit nervous about your obligations here, there are some exemptions and some “grace” that the CRA is extending to tax filers as they introduce these new rules

  • trusts that have been in existence for less than three months at year-end NOV 
  • trusts that hold only certain assets (such as cash or securities listed on a designated stock exchange) and have total fair market value of $50,000 or less throughout the year
  • registered plans such as the RRSP, RRIF, RPP’s, registered disability savings plan, RESP, TFSA and first home savings account
  • graduated rate estates and qualified disability trusts
  • mutual fund trusts and registered charities (including express internal trusts held by registered charities)

Given that trusts typically have a calendar year-end, the first tax return for 2023 would be due by April 2, 2024 (as March 30 falls on a Saturday, and April 1 is Easter Monday).

The CRA, in a guidance memo released on December 1, 2023 indicated that there will be no penalties for filing a trust return and a Schedule 15 for bare trusts after the deadline for the 2023 tax year only. However, the filing requirement remains in effect. If the failure to file is made knowingly or due to gross negligence, penalties may apply, the CRA stated.

The penalties for not filing here can get steep:

  • Balance due - 5% of the unpaid tax for when the return was required to be filed plus 1% of such unpaid tax for each full month that the T3 return is late to a maximum of 12 months
  • No Balance Due - $25 per day for each day the return is late up to $2,500

Call to Action

  • Think you may be the trustee of a bare trust - call your accountant/financial advisor ASAP (Ie. 1% owner, on title to family member’s property, In-Trust Account).  If you do have a reporting requirement, you will need to get to work now collecting the necessary information for the tax filing and get it to your tax accountant (all beneficiaries and trustees identities plus their their addresses, date of birth and taxpayer identification number, such as a social insurance numbers)
  • Be mindful of the reporting deadlines - 90 days following the end of the calendar year is March 30th (April 2 is the filing date as weekend/easter Monday)

As more information comes out from the CRA I will update you here on this channel.  Of course, if you have any questions or comments please leave them below.  Thank you for watching and I will speak with you soon.  Take care.