New T3 Requirements for Joint Accounts

Should you have established an in-trust-for (ITF) account for your minor child or hold specific assets jointly, you, and/or they, may now fall under the purview of recently implemented trust reporting regulations, effective for taxation years ending after December 30th. These regulations might necessitate the filing of a T3 Trust Income Tax and Information Return within 90 days of the year-end, irrespective of whether there's any income or activity to report. Given that trusts typically have a calendar year-end, the first tax return for 2023 would be due by April 2, 2024 (as March 30 falls on a Saturday, and April 1 is Easter Monday).

A common concern expressed by senior clients is the wish to avoid probate fees upon their passing. Jointly held assets, which bypass probate and its associated fees, are often pursued as a solution. Thus, elderly parents frequently opt to include adult children as joint title holders to bank accounts or the family home.

In doing so, the parent typically establishes a bare trust, with the adult child acting as a trustee, themselves as settlor, and sole beneficiary. The adult child's role is merely to hold legal title to the property and cannot take action without the parent's instructions as the beneficial owner.

In 2022, the federal government indicated that bare trusts would fall under the new trust reporting rules, effective from the 2023 calendar year. Although historically ignored for income tax purposes, these trusts are now subject to annual T3 trust return filings.

Exceptions to the new rules exist for certain trusts, potentially including bare trusts in specific scenarios, such as if the trust is less than three months old at year-end, or if it holds assets valued at $50,000 or less, limited to money, government bonds, and publicly traded securities.

The updated reporting regulations significantly expand the information required in the T3 return. Trusts are now obligated to provide comprehensive details about trustees, beneficiaries, settlors, and individuals with authority over trust decisions, such as trust protectors. This includes their personal information like names, addresses, dates of birth, residency jurisdictions, and taxpayer identification numbers. Moreover, the reporting must encompass beneficiaries whose identities are unspecified at the time of filing, such as unborn children or grandchildren.

Notably, the definition of "settlor" encompasses individuals or partnerships that have loaned or transferred property to the trust's benefit, directly or indirectly. This broad definition may include individuals employing common Canadian tax and estate planning strategies, like estate freezes, or those contributing nominal amounts to trusts without arm's length dealings.

Noncompliance with the additional reporting requirements incurs new penalties. Failure to file a T3 return as mandated results in penalties equal to the greater of CA$2,500 or 5% of the trust's highest total fair market value of held property in the year. These penalties also apply to knowingly false statements or omissions, or those made under circumstances of gross negligence. For Québec tax purposes, the 2021 Québec budget proposed a penalty of CA$1,000 plus $100 for each day of non-filing, capped at CA$5,000.

As this can be complicated, or, to ensure that you are meeting the compulsory filing requirements, please contact our office for our assistance.