Friday, October 14, 2022
UPDATE: This legislation has been revised, and the new requirements are now effective for trust taxation years ending on or after December 31, 2023 (previously 2022)
The Canadian government has released draft legislation that outlines new requirements for trusts to file tax returns every year, and this is going to affect a lot of people. You may be thinking “I’m not some wealthy elite with a trust fund”, but trust arrangements exist in all types of situations and many of them are informal without written documentation.
A “trust” exists when you own title to assets on behalf of somebody else. You have been “trusted” to hold the assets for them, but for all intents and purposes, the person you’re holding them for, the beneficiary, is the true owner.
There are formal trusts that you may have heard of such as family trusts, spousal trusts, alter ego trusts, testamentary trusts, and disability trusts. These trusts have always been required to file a trust tax return if they earn income or capital gains. They will now, however, be required to file a tax return each year regardless of whether there was income earned.
Consider that you’re the trustee of your parents’ estate, and the family home is being kept until one of the grandkids comes of age and can purchase it. The house is not being rented, so there is no income to report. Previously you wouldn’t have been required to file a tax return, but with the new rules you will now have to file a tax return every year (there is an exemption for the first 36 months after death).
Informal trusts will also be caught in these new rules. Where we often see informal trusts is with bare trusts. A bare trust is just like any other trust whereby the trustee holds title to an asset on behalf of somebody else. We often see this with real estate. Perhaps your parents have asked you to go on title to their home to reduce estate administration down the road. It’s agreed that you don’t technically have any ownership rights to the home, and that for all intents and purposes your parents still own the home fully. This would be an informal trust agreement and you will now need to file a tax return to report the relationship.
As an aside, we do recommend that anybody in a bare trust situation have a written bare trust agreement in place.
There are some exceptions to the requirement to file a tax return. The most common ones being that the trust does not need to file if it has only been in existence for less than three months, or if it holds less than $50,000 in assets and those assets consist of only cash, publicly listed securities, or government debt.
If your trust doesn’t produce any income, then there will be no taxes to pay and the tax return will just be for information purposes for the Canada Revenue Agency. The rules are effective for trust taxation years ending on or after December 31, 2023
. Generally, most trusts will have a year end of December 31 and the tax return is due 90 days after that, which is March 31st
in a leap year).
The penalties for failure to file are $25 per day, with a minimum penalty of $100 and a maximum of $2,500. If the trust knowingly fails to file, then there is an additional penalty of the greater of $2,500 and 5% of the maximum value of property held during the year.
If you believe that you will need to file a trust tax return for the 2023 taxation year, or if you’re not sure, please get in touch with our office as soon as possible so we can discuss the required documentation, and to ensure we have capacity to complete the filings on time for you.
- Elaine, Janine, Brian and the Hughesman Morris Liversedge team