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.

Does a trustee have to disclose the existence of a trust to a beneficiary?

At issue

A trust is an arrangement where someone holds property for another who is entitled to the income and/or eventual receipt of that property. Though things can get quite complex, for present purposes this simple definition suffices to distinguish the two key parties: the former being trustee and the latter being beneficiary.

A trustee is a fiduciary, which at its core imposes an obligation to hold the property solely for the beneficiary’s benefit. If and when called upon, the trustee must account to the beneficiary who is entitled to know that the trustee is fulfilling that obligation. But what if a beneficiary is unaware that there is even a trust in place?

A recent decision of the Supreme Court of Canada (SCC) sheds light on a trustee’s obligations in such a circumstance. While the case deals with a large scale commercial dispute, the principles laid down should be carefully considered by all trustees, including those involved in personal and family trusts.

Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8

This is a commercial construction case where there was a series of subcontracting relationships. Shortforming the names, BCC subcontracted work to LEL, which in turn subcontracted to VCL, and the events unfolded as follows:

BCC obtained a surety bond allowing a “beneficiary” who is unpaid for labour or materials to claim from the bonding company, as long as a claim is lodged within a defined 120 day period.
LEL became insolvent, leaving VCL with unpaid invoices. VCL was initially unaware of the bond (which was uncommon in projects of this nature), only becoming aware after the claim period.
VCL sued BCC for failing to inform of the bond and its requirements.

Good recordkeeping is a must, in large part to distinguish business from The Court accepted that BCC was in the position of trustee, then quoting from Waters’ Law of Trusts it held that wherever “it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed” of the trust’s existence, the trustee was obliged to disclose.

The Court ordered that BCC was liable to pay to VCL the amount that it could have obtained from the bonding company, had VCL been sufficiently informed to make a timely claim.

Application to personal trusts?

It is important to note that a beneficiary’s right to be informed of a trust is not absolute. Before reaching its conclusion in Valard, the SCC points out that where the interest of a beneficiary is remote, “it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.”

An example of when this remoteness might be considered would be where someone only becomes entitled if trust property remains after the death of a current beneficiary. Or perhaps a trust requires someone to reach a certain age before becoming entitled. Even more remotely, suppose a trustee has discretion whether or how much of the trust property to distribute to beneficiaries, or even to add or remove beneficiaries.

Trustees would be advised to check with their legal counsel where beneficiaries may be in the dark as to their status, particularly in light of the Supreme Court’s ruling in the Valard case.

Practice points

A trust is a separation of legal title to property from beneficial entitlement.
As the legal title holder, a trustee has an obligation to manage the trust property in the best interests of the beneficiary and to account for actions taken.
Where a beneficiary is unaware of the trust, the trustee may be obliged to inform the beneficiary of its existence. Whether and when the trustee must do so is a matter best discussed with a legal advisor.

Estate doesn’t own deceased’s Maple Leaf tickets, and is instead a constructive trustee

At issue

Sometimes estate assets have commercial value, other times emotional attachment, and frequently both. That last situation is ripe ground for estate disputes.

I have a friend who was a shareholder in a business corporation which owned Toronto Maple Leaf season tickets used to entertain clients. When the team moved from the Gardens to its new home at Air Canada Centre, the new tickets (and this may have been true of the old ones) were required to be held in his personal name, not in the name of the corporation as they had been at the time. When the corporation was wound down a few years later, one of the shareholders bought out the tickets, and they all shook hands and called it a day.

Their amicable resolution contrasts sharply with a recent case where an estate’s claim to Leaf tickets was opposed by the deceased’s business colleagues. But first, here are a few cases as warmups to the main event.

Fobasco Ltd. v. Cogan, 72 O.R. (2d) 254 [1990]

When major league baseball arrived in Toronto in 1976, Cogan subscribed for eight Blue Jays season tickets. Six of the eight tickets were subsequently offered to and paid for by the plaintiffs. Cogan advised in 1986 that he would soon cease making the tickets available to the plaintiffs, and though the dispute was settled for a time, he stopped sharing the tickets in 1989 when the Jays moved into the Skydome.

The plaintiffs failed in all their arguments under contract, resulting or constructive trust, and fiduciary duty. Importantly on the trust arguments, the judge found that Cogan initiated the purchase for his own benefit vis-à-vis the Blue Jays, then extended an offer to the plaintiffs.

Byers v. Foley, 16 O.R. (3d) 641 [1993]

The parties were members of a men’s softball team that decided to purchase Toronto Blue Jays season tickets beginning in 1983. Two of the teammates were designated to make the arrangements, and their names were recorded in the official records. In 1989 those two advised the others that they were no longer going to share the tickets.

The plaintiffs commenced an action based on constructive trust. As both the certainty of subject-matter (the tickets) and objects (the parties) were ascertained, the only issue was whether the third certainty of intention to create a trust had been met. In distinction to Fobasco v. Cogan, the purchasers acted on behalf of the group from the beginning, leading the judge to hold that the purchasers held the tickets as trustees throughout.

Trustee of estate of A.M.K. Investments Limited v. Kraus, (1996) 42 CBR (3d) 227

Kraus was listed as the licence holder for Toronto Raptors season tickets. His corporation, AMK, paid for and used the actual tickets. After AMK was petitioned into bankruptcy by its creditors, Kraus contended that he continued to own the ongoing licence.

The judge acknowledged the distinction between the licence and ticket purchase, but found on the facts that AMK funded the cost of both. Kraus was held to be trustee under a purchase money resulting trust in both respects, and was ordered to transfer the licence to AMK.

Anspor et al v. Neuberger, 2016 ONSC 75

Chaim Neuberger and Harry Sporer emigrated from Poland to Canada, launching a successful construction business in partnership as Nuspor. In the late 1960s or early 1970s, a business contact brokered a deal for the two to purchase Toronto Maple Leaf season tickets from its then-owner Harold Ballard. They were advised (incorrectly, though nothing turns on the point) that the tickets could not be held by Nuspor, so they decided to register in Neuberger’s name alone.

After Neuberger’s death in 2012, his daughter as executor took the position that the tickets were his personally, and in turn belonged to the estate. The plaintiffs argued that Nuspor was always the beneficial owner, with Neuberger (and later the estate) serving as trustee.

As in Byers, the facts and surrounding conduct showed that the tickets were being acquired for Nuspor, not Neuberger personally. Furthermore, and akin to AMK v. Kraus, Nuspor paid all amounts, thus satisfying the requirements of a purchase money resulting trust. The executor was ordered to transfer the tickets to Nuspor.

Practice points

Though these cases all involve Toronto franchises, a quick search of news and legal databases reveals that the issue crosses many borders – both geographic, and between here and the hereafter.
Inherent in the estate cases is that a person cannot pass on a better title than was held during life. Indeed, the estate will be bound by any restrictions imposed upon the living person, and will likely be required to extricate itself from any continuing involvement.
Whatever the commercial requirements of any sports club, it would be a good idea for any pooled ownership arrangements to be backed-up by clear documentation acknowledged by all purported owners and trustees.