Proposed federal amendments scale back trust filing requirements

Expanded trust reporting rules introduced for taxation years ending after Dec. 30, 2023 drew criticism for being overly broad and unclear.

In response, the Canada Revenue Agency (CRA) issued administrative relief and the federal Department of Finance introduced proposed legislative amendments (August draft legislation).

Although these proposals are subject to change, a version of these amendments is expected to be implemented—which will affect the filing requirements for the 2025 taxation year.

Trustees and their advisors should proactively evaluate how the amended rules could change their trust filing requirements, especially as required information may take time to collect.

Current reporting requirements

The types of trusts obligated to file a T3 tax return, and the information trusts must disclose, were expanded for taxation years ending after Dec. 30, 2023.

Canadian resident express trusts—or for civil law purposes, a trust other than a trust that is established by law or by judgement—must file a T3 return.

Listed trusts include trusts in existence for less than three months during the year, trusts that hold $50,000 or less in certain assets, and graduated rate estates. These new rules also introduced a filing requirement for bare trust arrangements.

For any trust which is a listed trust or is not a Canadian resident express trust, a T3 return should only be filed where income from the trust property is subject to tax and the trust meets one or more criteria listed in the CRA’s trust guide.

All trusts that are not listed trusts must disclose information—including names and addresses—of each trustee, beneficiary, settlor and person who has the ability to exert influence over the trustees’ decisions regarding the appointment of income or capital of the trust (Schedule 15 requirement).

Proposed amendments: Listed trusts

The August draft legislation expands the listed trusts for taxation years ending after Dec. 30, 2024 to include:

• Any trust holding $50,000 or less in assets, regardless of the type of assets.
• Trusts in which all of the following apply:
  • All trustees and beneficiaries are individuals, and the beneficiaries are related to each trustee.
  • The trust only holds certain types of assets, such as money, GICs, shares of a publicly traded company, or personal use property throughout a year.
  • The value of those assets does not exceed $250,000 throughout the year.
• Trust that are required under rules of professional conduct, or federal or provincial law, to hold funds for the purposes of activities that are regulated under those rules or laws—provided the trust account holds only money valued at $250,000 or less. This would include lawyers’ trust accounts held for specific clients.
• Trusts that would be a graduated rate estate if the estate had filed a return for the year.
• Trusts created by statute, such as bankruptcy trustees or provincial guardians.
• Employee ownership trusts.

Further amendments to the listed trusts would be effective for taxation years ending after Dec. 30, 2025. These include:

• If the trust beneficiary is a graduated rate estate of an individual related to the trustee in the year of the individual’s death, it would qualify under the first $250,000 asset value limit listed trust previously described.
• For listed trusts with a $250,000 limit on assets held, deposits in a Canadian bank, trust company or credit union and GICs in a Canadian bank, trust company or credit union would be considered as part of their assets held.
• Trusts governed by a retirement compensation arrangement—the primary purpose of which is to provide annual or more frequent periodic retirement benefits to supplement the benefits provided out of or under one or more registered plans—will be added as a new listed trust.

Proposed amendments: Bare trust deeming rule

A bare trust arrangement is effectively where a trustee is acting as an agent of the trust beneficiaries in respect of the trust property. The trustee holds legal title of the trust property and deals with the property at the direction of the beneficiaries.

These arrangements are common in real estate, oil, gas and mining industries, and partnership and joint venture business structures, but may be used elsewhere—even unknowingly.

While bare trusts are largely ignored for tax purposes, including that any income of the bare trust taxed as income of the beneficiaries, they are treated as express trusts for the purposes of T3 and Schedule 15 filing requirements.

The August draft legislation would repeal the current definition of bare trust effective for taxation years ending after Dec. 30, 2024, and would replace it with the following deemed trust definition for taxation years ending after Dec. 30, 2025:

A trust that would not be otherwise considered a trust under the Income Tax Act where one or more persons (trustees/legal owners) have legal ownership of property that is held for the use of, or benefit of one or more persons or partnerships (beneficiaries), and the trustees can reasonably be considered to act as agent for the beneficiaries.

The draft legislation would also exempt the following arrangements which would otherwise be captured by the above definition:

Related persons include those ordinarily defined as related persons under the Income Tax Act, as well as an aunt, uncle, niece and nephew, and the person themselves.  

Changes to Schedule 15

Schedule 15 requires disclosure of name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and tax information numbers of each trustee, beneficiary, settlor and entity or individual who has the ability to exert influence over the trustees’ decisions regarding the appointment of income or capital of the trust. 

The entities or individuals who must have their information disclosed does not currently include partnerships. The August draft legislation amends this requirement to encompass partnerships increasing the amount of information some trusts will need to disclose.

This amendment is applicable to taxation years that end after Dec. 30, 2024.

Addressing concerns

The expanded trust reporting rules for taxation years ending after Dec. 30, 2023 drew criticism for being overly broad and unclear. The revised rules address the narrow scope of assets that qualify for the types of listed trusts with asset valuation limits and the requirement that a graduated rate estate be designated as such to qualify as a listed trust.

One of the biggest beneficiaries of these proposed changes are companies in the oil and gas industry. Bare trusts are so frequently used by these companies that many were facing filing hundreds of returns—a substantial compliance burden.

New exemptions for resource property held for the use or benefit of one or more publicly listed companies—and general partners holding property on behalf of the partnership—should reduce the number of trusts these companies are required to disclose.

The amendments do not address all concerns with these rules. Outstanding concerns include:  

• The asset valuation limits for certain listed trusts are based on the fair market value of the assets, rather than the book cost. This may present issues for assets with cost fluctuations or whose valuation is not readily determined, such as shares.
• There are no listed trust exemptions for foreign retirement plans or domestic or foreign employee benefit plans other than employee profit sharing plans.
• Information that is covered by solicitor-client privilege does not need to be disclosed. Differing interpretations of what constitutes solicitor-client privileged information may complicate this reporting for law firms. Broadening this exception to include information it is reasonable to believe is covered by solicitor-client privilege would provide greater assurance. The confirmation that law firm trusts are bare trusts under the current and proposed definitions would assist law firms in understanding their obligations.
• As beneficiaries of bare trusts are required to report the trust’s income, many feel it is unnecessary to require bare trusts to file. As an alternative to removing the bare trust filing requirement, it was suggested the CRA introduce a pared-down T3 for these trusts.

Interpretive issues arise with the introduction of any new tax rules. Experienced advisors and interpretations issued by the CRA—and eventually, the courts—can assist taxpayers in navigating these new rules.