The CRA wants more information about more types of Trusts -including those you might not even know you have
As we have written about in the past, the CRA has expanded the tax reporting regime for Trusts. The rules are in effect for Trusts with years ending December 31st, 2023 or later, so the initial Trust returns under the new requirements are due to be filed April 2nd, 2024.
Do you need to file a Trust tax return
First, we need to identify all the Trusts that need to file a tax return. Prior to the expanded rules coming into effect, Trusts did not have to file a tax return if they:
- Had no tax payable
- Had income from all sources of less than $500
- Allocated no more than $100 to any Canadian resident beneficiary, and nothing to a non-resident beneficiary
- Made no distributions of capital
- Had no dispositions of capital property and realized no taxable capital gains
- Were not a deemed resident trust
Based on these criteria, many Trusts, whether due to the low value of the assets held, or the fact that the assets did not earn income, have not been filing in the past.
The new criteria to avoid having to file a Trust tax return are more restrictive. In addition to the above criteria, a Trust is not required to file a tax return if:
- it was in existence for less than 3 months before Dec 31st,
- the total value of Trust assets held at any time in the year is less than $50,000, and those assets consisted solely of cash, publicly listed shares/debts, mutual fund units/shares and non-foreign government guaranteed debts
- it is testamentary Trusts that has been designated as a Graduated Rate Estates
- it is a certain type of special purpose Trusts – charities, non-profit organizations, cemetery/funeral trusts, general law firm trust accounts, registered savings/education/disability plans, etc
Regardless of the criteria above, “bare Trusts” are specifically required to file an annual tax return.
The inclusion of bare Trusts is of particular importance because they can come to exist without deliberate action and could exist without the parties involved even knowing a Trust exists. The CRA has not defined what they consider to be a bare Trust, but have indicated that any “arrangement where a trustee can reasonably be considered to act as agent for all the beneficiaries under a trust with respect to all dealings with all of the trust’s property” would be included. This description would very likely include:
- a non-beneficial owner of real estate being added to the legal title (see UHT below)
- bank/investment accounts of children with their parents’ name on the account
- Real estate owners who have transferred ownership of their property to another entity but not transferred legal title
- Real estate developers that hold legal title in a separate entity from the development operations
- Family members holding title to other assets on behalf of other family members
Such arrangements could be in place for many reasons – avoid probate fees or land transfer taxes, enhanced privacy, worry about creditors or marital property claims – that are not related to tax. But it is the CRA position that all could be considered to be bare trusts and should file an annual tax return.
Common situations where an aging parent would add their adult child to the Title for the family cabin or farmland, or a new parent open an investment account for their minor child, are considered to be a bare Trust, and require a filing.
What information needs to be included
Second, we need to ensure that the required information is being included in those Trust tax returns. As in the past, income and expenses, significant foreign assets, certain transactions with beneficiaries and ownership of private corporations all needs to be included in the annual tax return.
Starting for 2023 tax returns and going forward, there is additional information that is required reporting:
- Name, address, date of birth, tax residence jurisdiction as well as Tax Identification Number (SIN, BN, TN or foreign equivalent) for the Settlor, all Trustees and all beneficiaries of the Trust, as well as anyone who could exert influence over the Trust
- Information on beneficiaries of the Trust that cannot provide the above (ie. unborn children or grandchildren that would be beneficiaries once born)
- New trusts must include a Trust number prior to filing
This information may be easy to obtain for Trusts with only close family members involved or in the case of bare trusts, but situations will exist where it is more difficult to obtain this important, generally private, information about the required parties. If the information is not available, it is important to document the unsuccessful efforts made to obtain it in case the CRA enquires about the missing information. The CRA has indicated that they require “reasonable effort” be made to obtain the information, but have not specified what that entails.
Failure to file the required Trust tax return, including this additional information, can be subject to penalties from the CRA. Technically, the returns are due 90 days after December 31st, or March 30th in 2024, but the practical filing deadline is April 2nd, 2024 due to the weekend and the statutory holiday on April 1st. The penalties start at $25/day for late filing, with a minimum of $100 and maximum of $2,500 per Trust tax return with no taxes owing. If there are taxes owing, the penalties will start at 5% of the taxes owing, plus an additional 1% for each additional month late, up to a maximum of 17%. Repeated failures to file can result in higher penalties.
A new penalty has also been put in place if the failure to file is determined to be done knowingly or due to gross negligence. These penalties include the greater of $2,500 or 5% of the highest fair
Some good news is that the CRA has announced that they will not charge the late-filing penalties for the 2023 tax year on bare Trusts, unless the late-filing was done knowingly or due to gross negligence. At the time of writing, they have indicated this is a single year policy and the regular penalty provisions will apply going forward.
For most Trusts that have not been required to file in the past, these new rules will result in some additional paperwork and compliance work, but the potential penalties warrant serious consideration.
Underused Housing Tax – The UHT
On a related note, the Underused Housing Tax returns that were introduced in 2023 required a similar type of reporting in situations where the legal title to residential property included the names of non-beneficial owners. These situations required a UHT return to be filed, and will also require a Trust tax return to be filed as a bare Trust. While a UHT return did not have to be filed where the property did not contain a residential property, such as farmland or bare land, this would still be considered a bare Trust and a Trust tax return should be filed. If a UHT return for 2022 has not already been filed, no penalties will be assessed if it is filed by April 30, 2024 so there is still time to ensure the filing requirements are met.
It is important to determine if your situation meets the criteria to require a Trust tax return filing and gather the necessary information to meet the April 2nd, 2024 deadline. Including as much information as possible on time is the best way to avoid incurring penalties. Planning may also be desired for minimizing reporting requirements going forward. Your Virtus professional is available to discuss your particular situation and advise on the best course forward.