Tag: TaxFiling

Trust reporting rules for 2023 and beyond

More, more, more: Affected trusts, entity disclosure and information required

Trusts have been around for centuries, used for flexibility, control and protection in personal, business and estate planning. The defining feature of a trust is that title and control of property – being anything that can be owned – is legally held by a trustee, distinct from the trust beneficiaries who are entitled to the use, consumption and income of that property.

While historically trusts could be actively employed to reduce tax, primarily by using graduated tax brackets, this was curtailed in 2015. Since then, graduated bracket use has been limited to graduated rate estates (generally the first 36 months of an estate) and qualified disability trusts. All other trusts are taxed at top bracket.

Today, tax planning serves more of a supporting or complementary role to a trust’s core purpose, rather than being the focus of planning. In that respect, trusts are still effective as a shield against excess tax, often by strategically allocating income and associated tax liability to make optimal use of beneficiaries’ lower tax brackets.

But regardless of the extent to which tax is an intention or effect of the arrangement, trusts continue to be tax reporting entities. And as of 2023, reporting obligations have significantly expanded the scope of affected trusts, the parties required to be disclosed, and the amount of information about those parties.

Legislative history

Federal legislation requiring enhanced trust reporting was first tabled in 2018, with revisions passed into law in December 2022. The revised rules apply to trusts with taxation years that end after December 30, 2023. As all trusts affected by these rules must use a calendar year-end, the new rules apply for 2023 and all future tax years.

The filing deadline is 90 days after the trust’s year-end. For 2023 reporting, the filing deadline of March 30, 2024 falls on a Saturday, so it is extended to the next business day, Tuesday, April 2, 2024.

However, on Thursday, March 28, 2024 — the last business day before the deadline — the Canada Revenue Agency (CRA) announced that “in recognition that the new reporting requirements for bare trusts have had an unintended impact”, reporting for bare trusts would not be required for the 2023 tax year unless the CRA makes a direct request for the filings. The agency stated it would clarify its guidance in the following months.

Enhanced reporting

Under the old rules, a trust resident in Canada was generally not required to file a T3 Trust Income Tax and Information Return unless it had tax payable or it disposed of capital property. As well, CRA generally granted administrative relief from filing where the trust had only nominal income, whether retained by the trust or allocated to Canadian-resident beneficiaries.

Three main changes

Generally, the new rules require that:

    • All trusts (with limited exceptions) must now file an annual T3 Return
    • Other than certain “listed trusts”, a Schedule 15 Beneficial Ownership Information of a Trust must be included with the T3 filing
    • Bare trusts are subject to the new reporting rules, but are exempt from the filing requirements for the 2023 tax year, unless CRA makes a direct request to a taxpayer

Whose information must be reported?

Schedule 15 requires information to be reportable on all of the following parties, collectively referred to as “reportable entities”. A reportable entity may be a natural person, corporation, trust or other legal form.

    • Settlors
    • Each trustee
    • Each beneficiary
    • Each “controlling person”, being anyone who has the ability, by the terms of the trust or related agreement, to exert influence over trustee decisions regarding the appointment of income or capital of the trust

What information must be reported?

The following information must be provided for each reportable entity:

    • Name
    • Address
    • Date of birth (if applicable)
    • Country of residence, and
    • Tax Identification Number (i.e., Social Insurance Number, Business Number, Trust Number, or, in the case of a non-resident trust, the identification number assigned by a foreign jurisdiction)

Affected trusts

Other than “listed trusts” (see below), the new reporting rules apply to all express trusts, being those created with the express intent of the settlor. According to common law, a trust comes into being once three certainties are in place: that the settlor intended to create the trust, that the subject property is ascertained, and that the beneficiaries are identified. Most often this will be in writing, but the terms may be oral, or both oral and written.

Examples of familiar arrangements that were previously exempt from filing but will now be covered by the new rules (understanding that this is not a comprehensive list), include:

    • Business use trusts established to hold private corporation shares or other ownership interests
    • Personal/family trusts used for property ownership, for example a vacation property
    • Spousal trusts used to allow tax rollover between spouse/common law partners
    • Alter ego and joint partner trusts used for oneself or a couple as a Will alternative
    • Testamentary trusts (ie., created under a Will), except graduated rate estates and qualified disability trusts

Bare trusts

Bare trusts are subject to the new reporting rules. A bare trust is one where the trustee is merely acting as the agent of the beneficiary/ies. Though property title may be in the trustee’s name, the trustee has no significant powers and can only act by permission and/or instruction of the beneficiaries. Examples of bare trusts include:

    • For privacy, a property developer may have real estate held by a trustee, while retaining beneficial ownership
    • Protecting against title merger of real estate and/or land transfer tax exposure
    • Interim title ownership pending completion of activity of a joint venture or partnership
    • Gratuitous addition of a child as joint owner on a parent’s financial account or property (depends on facts)
    • Specific trust accounts held by a lawyer pending or following a transaction

‘In trust for’ accounts

Adults, usually parents or grandparents, may deposit money into a financial account and record the name as being ‘in trust for’ a minor age child/grandchild. Naming an account as such does not in itself suffice to create a trust, but a trust may indeed be proven, according to the facts of the situation. While the determination of this being a trust will open the arrangement to the new reporting requirements, where small dollar figures are involved, it may qualify for exemption as a “listed trust” as discussed further below.

Exemption for listed trusts

“Listed trusts” are exempt from Schedule 15 beneficial ownership filing.

Listed trusts of a personal nature

As a non-exhaustive list:

    • A trust that has been in existence for less than three months at the end of the year
    • A trust that holds assets with a total fair market value less than $50,000 throughout the year, if the only assets are a combination of money and common financial instruments like publicly-listed shares and bonds, mutual funds and segregated funds

Listed trusts of a professional, commercial or financial nature

As a non-exhaustive list:

    • A registered charity, or non-profit club, society or association
    • Financial/commercial arrangements such as mutual funds, segregated funds, or other trusts with all units listed on a designated stock exchange
    • Regulated trusts such as lawyers’ general trust accounts, but not separate trust accounts for specific client trusts
    • Registered plans, including a DPSP, PRPP, RDSP, RESP, RPP, RRIF, RRSP, TFSA, EPSP, RSUBP, or FHSA
    • Cemetery care trusts and eligible funeral arrangements

Penalties

If a T3 Return or Schedule 15 is not filed as required, a penalty may be imposed. The penalty will be the greater of $2,500 and 5% of the highest amount of the fair market value of all the property held by the trust at any time in the year.

To accommodate for this being a first filing requirement for most bare trusts, CRA initially communicated that late filing penalties would be waived for 2023 reporting filed after Tuesday, April 2, 2024. With its March 28, 2024 announcement that bare trusts would only have to file when directly requested by CRA, its earlier positioning became moot.

12 things to do with your 2023 tax refund

Spending and saving in helpful harmony

Other than those who work in the tax business, no-one looks forward to preparing an income tax return –that is, unless you’re expecting a refund!

If you’re keen and prepared, the Canada Revenue Agency (CRA) allows for online filing of your 2023 personal income tax return as early as Monday, February 19, 2024. Otherwise, the deadline to file without facing a late penalty is midnight on Tuesday, April 30, 2024.

Whatever date you can get yours in, it’s a good idea to register for your CRA “My Account” and sign up for direct deposit. According to the agency’s website, you can receive your refund in as little as eight business days.

Back to the refund itself, you may have visions of champagne and caviar dancing in your head, but here are some tax-motivated suggestions to complement those thoughts, before it’s all spent.

1.    Your RRSP

As a first priority, consider contributing a portion into your registered retirement savings plan (RRSP). It can get your savings routine going early in the year, helping to generate another refund next year. Available contribution room includes carryover of previously unused room plus 18% of the preceding year’s earned income, up to the annually-indexed maximum prescribed by regulation. For 2024, that prescribed maximum is $31,560, reached at 2023 earned income of $175,333.

Even so, it’s important to understand that the reason many people get a refund is because their employer was not aware of RRSP contributions made outside the workplace. Too much tax may have been withheld on payroll than required, so really you’re getting back the money you loaned interest-free to the government over the year.

So, rather than waiting another 12 months before you get that next refund, you may wish to file CRA Form T-1213 with your employer to reduce the withholding tax on your payroll deposits. You’ll increase your current cash flow, rather than waiting to get it in a lump sum next year.

2.    Spousal RRSP

You can use your contribution room for your own RRSP or to put it toward a spousal RRSP. This sets the stage for income splitting between the two of you, as you get a deduction at your tax bracket now, and your spouse withdraws at an expected lower bracket later.

Understanding that the primary purpose is to assist with retirement income, that withdrawal does not have to wait until any particular age. Even so, don’t be too hasty: Withdrawals taken in the contribution year or in the two calendar years afterward will be taxed to the contributor spouse.

3.    RRSP loan paydown

An RRSP loan can give a boost to your RRSP if you don’t have money available as you near the contribution deadline at the 60thday of the year following the calendar year for which you intend to claim the deduction. Bear in mind though that interest on such loans is not tax-deductible, and neither is the repayment of the loan principal.

It’s a good idea to use the refund generated from the contribution to pay down the bulk of the loan initially, and pay off the rest over the coming months. Once the loan is paid off, you could continue that cash flow routine, but now contributing directly into your RRSP to get ahead on this year’s contributions – and next year’s refund.

4.    FHSA for first-home financing *new*

Available as of 2023, qualified individuals who do not currently own the property where they live may be eligible to contribute up to $8,000 annually (up to $40,000 lifetime) to a first home savings account (FHSA) to help with the down payment on a home. FHSA contributions are tax-deductible, accumulation is tax-sheltered, and withdrawals are tax-free when applied toward a first home purchase.

5.    Mortgage reduction

A home purchase is likely the largest single financial event of your life, usually accompanied by a mortgage that will take years or decades to pay off. An annual top-up from your tax refund is a simple and effective strategy to get you mortgage-free sooner. Those extra payments can reduce both the time to retire that loan and the interest you pay, giving you more flexibility and control of your finances along the way. And remember, both the interest and principal repayment are in after-tax dollars, which is another way of saying they are non-deductible – and that brings us to …

6.    Paying down discretionary non-deductible debt

There can be many points in life when available resources aren’t sufficient for current needs. That’s when the prudent use of credit can help you bridge the time until you have surplus money to work with. Still, you have to keep an eye on your debt, as it can easily compound against you faster than you can build savings if you’re not careful.
It helps to have a plan and commitment to eliminate debt as soon as manageable, to keep your finances on track.

7.    TFSA for flexible savings

The tax-free savings account (TFSA) was introduced 2009, complementing the RRSP program that has been around for more than half a century. TFSAs allow after-tax investment dollars to grow tax-sheltered and to be withdrawn tax-free. Each Canadian resident over age 18 is entitled to $7,000 of TFSA annual room in 2024, and for someone who was over 18 when it began in 2009 (but hasn’t used it), the carryforward room is $95,000.

8.    Life insurance for tax-smart family protection

Parents generally appreciate the value of life insurance, but may stall in putting it in place, being unsure where they’ll find the cash for the initial premium. A tax refund can be an ideal starter for systematically saving for and servicing that insurance, without disrupting the household budget. Once over that first hurdle, it becomes increasingly easier to sustain the routine. And if payment does come about, the insurance proceeds are tax-free.

9.    RESP for education

Post-secondary education costs continue to rise at staggering rates. That’s why it’s so important to save early and save smartly for a child’s education – which is where the registered education savings plan (RESP) comes in. Your tax refund can start or sustain an RESP. Coupled with generous government matching grants of up to $1,000 a year, all invested dollars grow tax-sheltered, with the earnings taxed to the student when eventually withdrawn for education needs.

10. RDSP for disability needs

Significant government support and tax benefits are available through the registered disability savings plan (RDSP) for families with disability needs. Government matching grants can be as much as 300% of personal contributions, making this a prime place to consider for tax refund money. Depending on household income, up to $3,500 in grants may be received in a year. Be sure, however, to coordinate the RDSP within an overarching life program, of which financial management is of course a key component.

11. Non-registered investments

Though we tend to think first of saving in the tax-sheltered plans mentioned earlier, there is a legal limit on how much can go into each of them. Once those options have been exhausted, you can use non-registered accounts that don’t have such limits. And depending on your age and stage in life, it can make sense to complement or supplement current savings with non-registered investments even sooner.

12. Live it up … a bit

After all, saving is just spending-in-waiting – but try to keep it in balance.