What constitute assets held in “trust” for the purposes of new ITA reporting requirements?

There has been considerable press coverage of the Canada Revenue Agency’s new trust reporting requirements, which have come into effect and apply to trusts with year-ends December 31, 2023 and onward.

Many exclusions from the application of the new reporting rules have been established and others are still being contemplated. But in the midst of all the press, it has become clear that these reporting rules apply to more ownership structures than those traditionally viewed as “trusts.” Indeed, the new requirement to report even applies to bare trusts, which the Income Tax Act (Canada) (the “Act”) expressly deems not to be trusts for other purposes of the Act.

So how are those who don’t have a Family Trust, or an Alter Ego Trust, or participate in any other ownership structure that uses the word “trust” captured under these transparency and reporting rules?

Partnerships

One example that may not immediately spring to mind is the operation of a partnership. If you operate as a partnership and hold partnership assets in your personal name, you are holding those assets in trust. Yes, your partner may also hold partnership assets in their personal name, with the intention being that each partner holds legal title to the assets relative to their overall interest in the partnership. However, the assets as a whole belong to the partnership – which means you hold them for the benefit of the partnership, which you are then entitled to a proportionate share of. That relationship constitutes a reportable trust transaction under the new reporting requirements. There is an important legal distinction between holding something entirely for our own benefit, and holding something in our name when another person or legal entity also has an interest in it.

Joint financial accounts

Another example that will likely come as a surprise, is that of joint financial accounts between parents and adult children. When children are added to a parent’s financial accounts for estate planning purposes, in most cases the relationship between the child and the assets during the parent’s lifetime will be captured by the reporting rules. Granted, these rules only apply to assets over $50,000 in value and a parent’s chequing account may never reach this value. But what of their savings account and their equities or GIC accounts? Certainly, a child whose name is placed on title to a parent’s home for estate planning purposes will need to be attentive to the new trust reporting rules.

The federal government’s new trust reporting rules are similar in their intent to other recent transparency legislation relating to real property and corporate ownership. By establishing a repository of information on settlors of trusts, their trustees and their ultimate beneficiaries, Canada seeks to support its commitments to the international community in countering money laundering, tax evasion and aggressive tax avoidance, among other criminal activities involving the transfer of valuable assets.

In order to maintain the ongoing accuracy of this new informational repository, a T3 Return and a Schedule 15 for each beneficiary are required to be filed each year, for each trust that is not exempted under the rules, even when that trust does not have an obligation to pay any tax. The regime includes potentially significant penalties for non-compliance with these filing requirements and, because of this, it is important to review ownership structures to determine whether you are required to file.

Key takeaways

Since the reporting regime was designed to be very broad, there are circumstances that will give rise to filings that are not initially intuitive. When formal trusts are settled, it is common to see assets remain registered in the hands of an original asset holder, notwithstanding the beneficial interest in these assets having been settled upon the trust. This may be to avoid the immediate cost of property transfer or other taxes, among other purposes. But in this case, there is now a bare trust in addition to the formal trust and each will be required to file separately.

Furthermore, it will be necessary not only to file a Schedule 15 for beneficiaries whose interests in a trust are already vested, but also for contingent beneficiaries whose interest in the trust vest upon a future occurrence. A good example of such a beneficiary is a young beneficiary who must attain a specific age before their interest in the trust becomes distributable.

Another key takeaway to consider is that income is not a factor in the new filing obligations. It is not necessary for a trust to have earned income – a bare lot with no lease or rental income, or a non-interest bearing account with a fixed cash value throughout a tax filing period will be subject to a “nil return.” Filing a return with nil income to report is not new, but doing so in this context, along with the addition of a Schedule 15 for all beneficial interest holders, is most certainly going to catch many taxpayers off guard.

To learn more about how trust and estate matters can impact you and your family members, contact a member of MLT Aikins Estate Planning & Administration team today.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should not be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.