Canadian trust reporting for law firms

Canadian trust reporting for law firms

Under new legislation for trust reporting, law firms may be subject to the filing requirements of a T3 Trust Income Tax and Information return beginning in 2023.

What are the new trust reporting rules?

Under the Canadian Income Tax Act, trust arrangements (with certain exceptions) are now required to file a T3 Trust Income Tax and Information Return which includes enhanced reporting and disclosure of information.  The new reporting is effective for trusts with tax years ending on or after Dec. 30, 2023.

What are the exceptions?

There is an exception to the reporting requirements for regulated trusts such as lawyers’ general trust accounts (trusts that are required under the applicable rules of professional conduct or the law of Canada or a province to hold funds for the purposes of an activity that is regulated under those rules or law). 

However, the exception does not apply to separate trust accounts established for a client or clients. 

This means that law firms holding funds in separate trust accounts for their clients (for example, to hold retainer funds, trust settlement amounts, proceeds of the sale of real estate, etc), are subject to this new filing requirement for every separate trust account.  The reporting and disclosure required do not require the disclosure of information that is subject to solicitor-client privilege.

If a trust account is not exempt under the above, there may still be a couple of limited exceptions that are provided to all trusts:

• Those that have been in existence for less than three months at the end of the year; or
• Those that hold less than $50,000 market value in assets throughout the tax year provided that their only holdings are the following:
  1. money, 
  2. certain government debt obligations,
  3. a share, debt obligation, or right listed on a designated stock exchange,
  4. a share of the capital stock of a mutual fund corporation,
  5. a unit of a mutual fund trust,
  6. an interest in a related segregated fund and
  7. an interest as a beneficiary under a trust, all the units of which are listed on a designated stock exchange;

*This exception does not apply if the limit is exceeded at any time during the year or if the trust, however briefly, holds other property (property that is not deposits, government debt obligations, and/or listed securities).

What information is required to be reported?

Trustees are required to report additional information for all parties of the trust including legal name, address, date of birth (in the case of an individual), jurisdiction of residence, tax identification number (social insurance number, business numbers, trust number, foreign tax number).

Filing and deadline

The T3 Trust Income Tax and Information returns are filed on an annual basis with a deadline of 90 days after the calendar year-end. 

For 2023 T3 returns, this will be a filing deadline of March 30, 2024.

What are the penalties?

There are penalties associated with failure to comply that are significant.

• Failure to file a return: Penalty of $25 for each day late, with a minimum penalty of $100 and a maximum of $2,500.
• False statement or omission: Penalty of 5% of the maximum value of property held by the trust during the relevant year, with a minimum penalty of $2,500, in the following situations:
  • Where a failure to file a return was made knowingly or due to gross negligence,
  • False statements and omissions
  • Failure to respond to CRA demand to file