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Update #2: Are You Ready For The New Trust Reporting Rules?

POSTED November 03, 2022 BY Yuri Kostowskyj Blog

This post is an update to our January 2022 post regarding the new Trust reporting rules. The information can be found here https://fkllp.ca/are-you-ready-for-the-new-trust-reporting-rules-2/

If you have a family trust or a bare trust arrangement these new reporting rules will impact you.

The Department of Finance recently released updated draft legislation regarding the new reporting requirements for trusts. The new reporting requirements were originally proposed to apply to December 31, 2021, and future taxation years, but the implementation of these rules was pushed back. The new reporting rules are now proposed to apply to December 31, 2023, and future year taxation years.

The new reporting rules will apply to Express Trusts resident in Canada, Bare Trusts, and all non-resident trusts that currently must file a tax return in Canada.

Express Trusts

In general, an express trust is a trust that is created deliberately by a settlor and is usually documented in writing. A personal trust (or family trust) is the most common type of express trusts that we see with our clients.

The following express trusts are exempt from the new rules:

  • Graduated rate estates
  • Registered savings plans (i.e. RRSP, TFSA, RESP)
  • Lawyer’s general trust accounts
  • A few other specific types of trusts

Historically, many personal trusts, whether established for estate planning purposes or to hold personal assets like vacation properties, were exempt from filing a trust return so long as they had:

  • No taxes payable
  • Did not sell capital property
  • Only allocated nominal income to beneficiaries during the year

The proposed legislation, limits filing exemptions to trusts that:

  • Have been in existence for less than three months at the end of the year
  • Hold less than $50,000 of assets throughout the year, provided the assets only consist of cash, certain debt obligations, and listed securities

The significant reduction in filing exemptions will result in many personal trusts having to file for the first time for their December 31, 2022 tax year-end. If you have a personal trust that you have not been filing trust returns for, please find and share a copy of the trust deed with your Fruitman Kates advisor.

Bare Trusts

A bare trust exists when a trustee holds legal title for the benefit of the beneficiary (or beneficiaries) and has no other power regarding the assets held in trust. The trustee takes direction from the beneficiary and acts as their agent.

Common uses for bare trusts include:

  • Real estate joint ventures – a bare trust (generally a corporation) usually has legal title of the property.
  • Limited Partnerships– In Ontario Limited Partnerships can’t hold legal title to land so often a bare trust is used to hold title for the Limited Partnership.
  • Condominium deposits – often held in-trust by the builder until the project closes.
  • In-trust investment accounts for minor children– usually a parent is the legal owner of the account.
  • Investments – when the capital table is limited a group of investors is formed to make an investment.
  • Joint accounts will elderly parent – usually a child is on the account but only for legal purposes
  • Estate planning – having assets that would otherwise be subject to estate administration tax owned by a bare trust corporation.

Prior to these new rules, bare trusts were not required to file a trust return. Under the new rules, bare trusts will be required to file trust returns unless they have been in existence for less than 3 months or hold less than $50,000 of assets throughout the year, provided the assets only consist of cash, certain debt obligations, and listed securities. Note that this new filing requirement is in addition to any existing filing requirements that the bare trust may have.

If you have a bare trust arrangement, please contact your Fruitman Kates advisor.

Additional Information Disclosure

In addition, new reporting rules require the following information to be disclosed for each trustee, beneficiary (including a contingent beneficiary), settlor, and, in some cases a protector (a person that can influence certain decisions of the trustees):

  • Name
  • Address
  • Date of Birth (for individuals)
  • Jurisdiction of residence
  • Taxpayer identification number (i.e. social insurance number, business number, trust account number or foreign equivalent)

This information will be reported on a new schedule in the trust return.  Please gather and provide this information to your Fruitman Kates advisor.

Penalties

For 2022 and future years, the penalty for not filing a trust return is $25 a day, with a minimum penalty of $100 and a maximum penalty of $2,500. The new rules also introduce an additional penalty for a false statement of omission in a trust return. The new penalty will apply when a person knowingly or in circumstances amounting to gross negligence makes the omission or fails to file the trust return. The penalty is 5% of the maximum fair market value of the Trust’s assets during the year with a minimum penalty of $2,500.

It is prudent to assume that these new rules will receive royal assent and become law soon and that the new reporting rules will begin to apply for the December 31, 2022 taxation year.

Trustees should familiarize themselves with the new rules and start gathering information so that they are prepared to get the 2022 Trust Returns filed by the March 31, 2023 deadline.

Please contact your Fruitman Kates advisor if you any questions.