On August 12, 2024, the Department of Finance (“Finance”) introduced draft legislation containing proposed amendments to the trust reporting rules in the Income Tax Act (the "Act"). If enacted, these amendments would exempt more trusts from the trust information filing requirements that came into force last year.

These draft amendments intend to address two issues that trustees and their advisors have been eager to clarify:

• which taxpayers are required to file T3 Trust Income Tax and Information Returns per paragraph 150(1)(c) of the Act; and
• which taxpayers are required to provide additional “beneficial ownership information” in T3 Schedule 15, as per Regulation 204.2(1) of the Act.

The Recent History

The current trust reporting rules were first announced in the 2018 Federal Budget, and came into force with some modifications on December 15, 2022, applying to trusts with a taxation year ending after December 30, 2023. The rules are intended to allow the Canada Revenue Agency (“CRA”) to collect more information on trusts than was available under prior law and capture most trusts that are resident in Canada and some non-resident trusts. Simplified, the rules:

1. create an obligation to file a T3 return for all trusts that are resident in Canada and are express trusts (including “bare trusts”), unless an exception applies;
2. create a requirement for certain trusts to report the identity of all trustees, beneficiaries, settlors, and persons who exercise the ability to exert control over trustee decisions regarding the trust’s appointment of income or capital. The trust must report the name of each such person, its entity classification, address, date of birth (if the taxpayer is a natural person), country of residence, and tax identification number; and
3. impose penalties for failing to comply with the new reporting requirements. There is a T3 late filing penalty of $25 per day, to a minimum of $100 and a maximum of $2,500. Further, if a trust fails to file a return “knowingly or under circumstances amounting to gross negligence”, or fails to comply with a demand order from the CRA to file a return, there is an additional penalty of the greater of $2,500 or 5% of the maximum fair market value of the property in the trust during the year.

Without much guidance at the time the current rules came into force, many taxpayers perceived these requirements and penalties for bare trusts, in particular, to be both onerous and unclear.

In an attempt to assist, the CRA stated that it would waive failure to file penalties for bare trusts for the 2023 taxation year. The CRA then announced on March 28, 2024 that bare trusts would not have to comply with the reporting obligations for the 2023 taxation year (i.e., reporting in respect of trusts that existed in 2023). On October 29, 2024, the CRA announced that bare trusts will not be required to file a T3 return for either the 2023 or 2024 tax year.

The Proposed Amendments

Finance now proposes to enhance clarity through amendments to the Act. The draft legislation proposes to “more clearly define the beneficial ownership arrangements” subject to both filing requirements and enhanced reporting requirements. The effect of the changes may be to narrow the scope of the existing rules and provide more direction to taxpayers and their advisors.

1. Clearer standards for the existence of a trust

One proposal is to replace existing subsection 150(1.3) of the Act to more clearly define what entities are considered “trusts” for the purposes of trust reporting.

The reporting requirement for trusts is contained in paragraph 150(1)(c). Currently, subsection 150(1.3) provides that “an arrangement under which a trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property” (i.e., a bare trust) is a trust and therefore must file a T3 return.

The new legislation proposes to repeal existing subsection 150(1.3) and replace it with new subsections 150(1.3) and 150(1.31). New subsection 150(1.3) would no longer refer specifically to bare trusts and would instead deem the following arrangements to be a trust for the purposes of trust reporting:

• one or more persons… have legal ownership of property that is held for the use of, or benefit of, one or more persons or partnerships; and
• the legal owner can reasonably be considered to act as agent for the persons or partnerships who have the use of, or benefit of, the property.

If these conditions are satisfied, the legal owner is deemed to be a trustee of the trust, and the person benefitting from the property is deemed to be a beneficiary of the trust.

The Explanatory Notes accompanying the proposed change to subsection 150(1.3) clarify that the provision “relies upon the existing trust concept of the division of legal and beneficial ownership”. The actual proposed language of new subsection 150(1.3) adopts a broad interpretation of “beneficial ownership” and does not require a beneficiary to have any amount of control over the property for a deemed trust to arise. Subsection 150(1.3) as it is proposed to be amended only requires that a beneficiary have the “use of, or benefit of, the property” and that the property is held by the deemed trustee for that purpose. Proposed subsection 150(1.3) may therefore capture some arrangements that are not generally thought of as bare trusts in which the benefitting party simply uses certain property without controlling it in any meaningful way.

Proposed subsection 150(1.31) outlines certain exceptions to the deemed trust provisions in proposed subsection 150(1.3). The exceptions include arrangements in which:

• each legal owner of the property is also a deemed beneficiary;
• related individuals hold real property that would qualify as the principal residence of one or more of the legal owners for the year;
• an individual holds real property that would qualify as their principal residence for the year and is used by their spouse or common-law partner;
• the general partners of a partnership hold property solely for the use or benefit of the partnership, where the partnership is required to file a T5013 information return for the relevant fiscal period;
• the property is held by the legal owner pursuant to a court order;
• the property is a Canadian resource property held by certain persons or partnerships solely for the benefit of a publicly traded corporation, a corporation controlled by a publicly-traded corporation, or a partnership where a publicly-traded corporation directly or indirectly holds the majority interest in the partnership; or
• the property is held exclusively for the use or benefit of a tax exempt person under subsection 149(1), each legal owner is a person described under subsection 149(1), and the property consists solely of funds received from the Crown.

These proposed exceptions are useful for certain taxpayers and tax-exempt persons. However, proposed paragraphs 150(1.31)(d) and 150(1.31)(f), in particular, fall short of providing relief to some taxpayers that ought to fall into one of these exemptions. For example, proposed paragraph 150(1.1)(d) only applies to general partners that hold property solely for the use or benefit of the partnership, and not any nominee other than the GP that holds legal title on behalf of the partnership. Similarly, proposed paragraph 150(1.31)(f) is drafted to narrowly exempt arrangements where a person or partnership holds a resource property for the benefit (directly or indirectly) of a publicly traded corporation. Private corporations (including Canadian-controlled private corporations) with similar beneficial ownership of Canadian resource properties are not exempt, and as a result, arrangements where resource property is held for their benefit may be deemed trusts for the purpose of the reporting requirements.

2. Expanded exceptions to T3 filing and beneficial ownership reporting

Finance is also proposing to amend subsection 150(1.2) of the Act to exempt certain trusts from the requirement to file a T3 and provide beneficial ownership information to the CRA.

Pursuant to subsection 150(1.1) , a trust that is either (a) a registered charity throughout the year; or (b) has no tax payable, has realized no capital gains, and has no Lifelong Learning Plan or Home Buyer’s Plan balances, does not have to file a return if it also meets one of the exceptions in paragraphs 150(1.2)(a)-(p). The proposed legislation includes the following new exceptions:

• the trust holds assets with a total fair market value not exceeding $50,000 throughout the year (Finance could improve this drafting with “…at any time in the year” instead of “…throughout the year”). The current version of this exception contains both the $50,000 threshold and limitations on the types of assets the trust may hold;
• each trustee of the trust is an individual, each beneficiary is an individual and related to each trustee, the total fair market value of the property of the trust does not exceed $250,000 throughout the year, and the trust only holds enumerated types of assets;
• the only asset held by the trust throughout the year is money not exceeding $250,000 and the money is held by a professional required by rules of professional conduct to hold trust funds in a separate account for a particular client. A regulated professional’s general trust account is also exempt from filing and not subject to any monetary limit. Currently, regulated professionals’ separate trust accounts are not exempt from filing; or
• the trust was established for the purpose of complying with a statute in Canada or a province that requires property to be held in trust for a specific purpose.

Finally, even if a trust does not meet the requirements of subsection 150(1.1) of the Act and a T3 filing is required, the trustees of a trust described in proposed subsection 150(1.2) would not have to include T3 Schedule 15 with additional beneficial ownership information.

The de minimis thresholds are based on fair market value instead of the cost of the assets, without regard for whether accrued gains are realized. If relying on a de minimis exemption, asset values will need to be constantly monitored to ensure that price fluctuations do not cause the fair market value of the trust’s assets to exceed the relevant threshold at any time in the year.

The Joint Committee Submission

On September 11, 2024, the Canadian Bar Association / CPA Canada Joint Committee on Taxation provided Finance with a submission summarizing issues that the Joint Committee identified in the legislation’s technical amendments. The Joint Committee made 18 recommendations to further improve the draft legislation. The submission can be found here.

We understand that other industry groups and interested parties have also made submissions to Finance to suggest improvements to the draft legislation.

Conclusion

The proposed amendments represent a welcome improvement to the trust reporting regime. The draft legislation would narrow the definition of a “trust” to no longer include reference to all bare trusts and explicitly excludes particular arrangements where disclosure would be inappropriate or redundant. It would also expand on the exceptions for filing T3 returns in subsection 150(1.2) of the Act and, in so doing, further reduce the number of trusts required to disclose additional beneficial ownership information.

That said, the trust reporting regime still considerably expands the categories of trusts required to: (i) file T3 returns; and (ii) disclose additional beneficial ownership information. Taxpayers should consult their tax advisors to determine their reporting obligations, including in respect of bare trust arrangements for 2025 and subsequent taxation years.

For further information and updates on the new trust reporting regimes and any updates to these proposed amendments, please follow the McCarthy Tétrault Tax Perspectives blog.