Despite taking years to develop, Canada’s new trust reporting rules remain in a state of flux. Historically, a trust only had to file a T3 return if the trust had tax payable or if all or part of its income or capital was distributed to its beneficiaries. However, under the new reporting rules which came into effect earlier this year, a T3 must now be filed annually for many trusts, and additional information regarding the trustees, beneficiaries, settlors, and any persons who have the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust must also be provided: see Reporting Requirements for Trusts.

While the new rules have only required additional trust reporting for the 2023 tax-year so far, a number of amendments have already been proposed. For example, as noted on Ian’s blog last week, if new amendments applicable to bare trusts are enacted, bare trusts will again be exempted from the new trust reporting rules for the 2024 tax-year: see Government Proposes Delaying Trust Reporting Rules for Bare Trusts Until 2026. However, bare trusts are not the only type of trust impacted by the proposed amendments to the Income Tax Act.  

Further Trust Exemptions

The proposed amendments to the Income Tax Act would expand the range of trusts exempt from the new reporting rules under subsection 150(1.2) of the Act, thereby reducing the number of trusts required to report to the government. Earlier this year, Diana blogged about the trusts which are currently exempt: see her post, Exceptions to the New Trust Reporting Rules. With the proposed amendments, the trusts exempted under the Act could also include:

• Trusts with a fair market value that does not exceed $50,000. Currently, trusts valued at $50,000 may be exempted from the reporting requirements, but only if the trust holds certain types of assets, such as money, publicly-traded shares, and mutual fund trust units. The new exemption would apply to all trusts worth $50,000 or less, regardless of what assets are held by the trust.
• Trusts where:
  • both the trustees and beneficiaries are individuals,
  • the beneficiaries are related to each trustee,
  • the total fair market value of the trust property does not exceed $250,000, and
  • the trust holds certain kinds of assets, such as money, GICs, and publicly-traded shares.

To give an example, in-trust accounts that parents set up for their children would be exempted from the reporting requirements under this provision.

• Funds held in trust pursuant to professional regulatory obligations, so long as the funds are not maintained as a separate trust for the client. Alternatively, if a separate trust is maintained for the client, the exemption would only apply if only money with a value that does not exceed $250,000 is held in trust.
• Statutory trusts established to comply with a provincial or federal statute which requires the trustee to hold the property in trust for a specified purpose.

New Definition of Settlor

In the context of trusts, the term “settlor” typically refers to the person who created the trust. However, under the Income Tax Act, the definition of this term is more complex. In subsection 17(15) of the Act, a “settlor” is defined as “any person or partnership that has made a loan or transfer of property, either directly or indirectly, in any manner whatever, to or for the benefit of the trust.” This provision includes exceptions for persons or partnerships dealing with the trust at arm’s length, so long as a loan to the trust is subject to a reasonable interest rate, or a transfer is made for fair market value consideration.

With the proposed amendments for trust reporting, a simpler definition of settlor would be incorporated into section 204.2 of the Income Tax Regulations. Any parties who make a transfer to a trust for fair market value consideration or pursuant to a legal obligation to make the transfer would not be considered settlors under the new reporting rules, and therefore would not have to be included in the trust’s annual reporting.

When Will the Amendments Take Effect?

As noted last week on the blog, we do not yet know whether there are plans to enact the proposed amendments to the Income Tax Act in their current form, or whether we can expect to see further revisions. We will blog about the proposed changes to the trust reporting requirements again, once there is more news.

Thank you for reading, and have a great day!

Suzana.