Background
The Fall Economic Statement Implementation Act, 2022, which received Royal Assent in December 2022, codified new reporting requirements for trust accounts. While a lawyer’s general trust account is exempt from the new requirements, client-specific trust accounts will be required to file annual tax returns (starting for the 2023 taxation year).
Prior to the new trust reporting obligations coming into force, the CBA had recommended a broad reporting exemption for any trust account maintained by a lawyer or notary in accordance with the rules of professional conduct governing them (which includes trust accounts maintained for particular clients).
While this recommendation was not accepted, important amendments were included in December 2022 to address some of the CBA’s concerns. In addition, since then, we have continued to engage with the CRA to influence the guidance material and forms being developed to implement the new reporting obligations.
To date, we can report the following:
Short term trusts exempted: Trusts in existence for less than three months at the end of the year are exempted. This captures two scenarios: 1) trusts created less than three months before the end of the year and 2) short-term trusts that existed for a period of less than three months during the year. Please note that a trust that is formed late in one year and then continues into the next will have to file a return for the second year (but not for the first) if the total days the trust exists exceeds three months as measured from the inception of the trust in year one.
Certain small trusts exempted: The legislation also exempts certain smaller trusts. These include trust accounts that hold assets consisting only of money and that have a fair market value that does not exceed $50,000 throughout the year. These trusts might be exempt in some years due to this dollar value threshold, but might be required to file in other years where the $50,000 value is exceeded. Note that in the case of trust accounts holding foreign currency this exemption is determined by the Canadian dollar equivalent of the foreign currency held in the account.
Bare trusts: In most cases a lawyer’s trust account will be a “bare trust,” i.e. a trust under which the trustee does not exercise any independent discretion and is required to follow the beneficiary’s instructions in all respects at all times. CRA has confirmed that while “bare trusts” are subject to the T3 reporting requirements they need not, and should not, report income – instead, that income should be reported on the return of the beneficial owner in the same manner as in the past. We continue to work with CRA to obtain greater precision on how bare trusts should answer certain questions that are set out in the T3 return.
CRA is adopting an “education-first” approach to compliance and waiving the late-filing penalty for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline. This relief is for bare trusts only and only for the 2023 tax year. This penalty relief does not apply to missing information (see below) and also does not apply if the failure to file the T3 Return and Schedule 15 for the 2023 tax year was made knowingly or due to gross negligence, in which case the applicable penalty will be equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.
Condominiums: The condominium Bar has been actively looking at the implications of these new reporting rules as they will apply to trust accounts established pursuant to provincial condominium legislation. At the present time there are no special rules or guidelines that apply specifically to such trust accounts.
Charities: Further to our efforts, the CRA has recently confirmed that registered charities are not required to file the T3, Trust Income Tax and Information Return, for internal trusts. Internal trusts are those created when a charity receives property as a gift that is subject to certain legally enforceable terms and conditions; and holds that property as the trustee of the trust.
Filing obligations: T3 returns are generally required to be filed within 90 days of the calendar year-end, but since March 30, 2024 falls on the Saturday of the Easter long weekend, the CRA has stated in frequently asked questions issued on December 1, 2023 that, “the filing deadline of March 30, 2024, is extended to April 2, 2024, the first business day after the deadline.” Those responsible for filing T3 returns are subject to penalties for failing to provide any required information unless in the case of information required in respect of another person or partnership a reasonable effort was made by the person responsible for filing the return to obtain the information from the other person or partnership. Those responsible for filing T3 returns should seek advice from a tax professional if they are uncertain about their compliance obligations.
Solicitor-client privilege and duty of confidentiality: The new trust reporting requirements do not require the disclosure of information that is subject to solicitor-client privilege. We do not expect CRA, which is knowledgeable about tax laws but not other laws, to offer any guidance on how to interpret or apply the solicitor-client privilege protection. At this point we can only recommend that where information is withheld on the basis of privilege the analysis underlying that decision should be documented and retained on file. Lawyers should also be mindful of the duty of confidentiality owed to clients.
Next steps
On December 1, 2023, the CRA published frequently asked questions on the new reporting requirements for trusts. CRA is also currently updating their tax reporting forms and the T3 Guide to reflect these new obligations. It is possible but not assured that additional clarity may be provided by separate publications by CRA in the coming months as further issues are brought to their attention.
Read an analysis of the question in National magazine.