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New rules for trust (“T3”) reporting – YOU MAY BE AFFECTED

We would like to inform you about the new rules for trust (“T3”) reporting that have been recently introduced by the Canadian government. These rules may affect you whether you knowingly have a trust or not. Please read on for more information.

BACKGROUND

Effective December 31, 2023, for the 2023 calendar year, the new trust reporting rules under Bill C-32 (Fall Economic Statement Implementation Act, 2022) aim to fill significant gaps in the collection of information related to trusts through the tax system. The government’s intention is to address tax evasion, money laundering, and other financial crimes.

The current rules for trust reporting dictate that inactive trusts are not required to file, and no beneficiaries of the trust are required to be identified. A T3 return for a tax year must be filed if the trust:

  • Has to pay tax for the year
  • Disposes of a capital property, or
  • Distributes all or part of its income or capital to its beneficiaries

Under the new reporting rules, the requirement to file and the information gathered on trust stakeholders is greatly expanded.

WHAT ARE THE NEW TRUST REPORTING RULES?

For taxation years ending after December 30, 2023 (effectively 2023 and later tax years) the new reporting requirements affect:

  • “Express trusts” resident in Canada are trusts created with the settlor’s express intent, usually made in writing. For example, a family trust.
  • Non-resident trusts that are currently required (see current rules above) to file a T3 return.
  • “Bare trusts” – arrangements whereby trustees have no obligation other than to deal with the trust property as instructed by the beneficiaries. Put simply, the trustee holds the legal title but has no independent power, discretion or responsibility over the property. For example, someone adds a child to the legal title of a property to avoid future probate fees but they remain the sole beneficial owner of the property.

**TIP – unsure if you are a party to a bare trust arrangement? Recall contractual agreements where a family member, corporation or related party holds an asset in trust for you or vice-versa. These can also take a written form such as a “Bare Trust Agreement”, “Nominee Agreement”, “Declaration of Bare Trust”, or “Agency Agreement”. If you’re still unsure, please discuss it with us or have your lawyer contact our office.

Common exemptions from the new reporting rules (but aren’t limited to):

  • Trusts that have existed for less than 3 months at the end of the year.
  • Trusts that hold less than $50,000 CAD in assets throughout the tax year (as long as they only hold specific types of assets such as deposits, government debt obligations, and listed securities).
  • Graduated rate estates and qualified disability trusts.
  • Trusts governed by registered plans (i.e. RRSP, TFSA, FHSA).
  • Lawyers’ general trust accounts.
  • Cemetery care trusts and trusts governed by eligible funeral arrangements.

OKAY, I THINK THESE RULES APPLY TO ME – NOW WHAT?

As noted above, you will be required to file a T3 trust return for the affected trust. This may be new for those who have inactive trusts and weren’t previously required to file or for those who have bare trust arrangements that fall under the new reporting rules.

In addition, the T3 trust return has the new Schedule 15 “Beneficial ownership information of a trust” for you to report information regarding all “reportable entities”. A copy of Schedule 15 can be found here.

Reportable entities include all the trust’s trustees, beneficiaries that are known or ascertainable, settlors, and in some instances, a protector of a trust. The reportable information includes:

  • Name
  • Type and classification of entity
  • Address
  • Date of birth
  • Country of residence
  • Taxpayer identification number (i.e. SIN, trust account #, business number, or foreign equivalent)

WHAT HAPPENS IF I DON’T FILE?

The penalty for not filing a T3 when required and/or not filing Schedule 15 with the return is $25 for each day the return is late with a minimum penalty of $100 and a maximum penalty of $2,500.

The new rules also impose a significant additional gross negligence penalty where the trust fails to file either knowingly or due to gross negligence. This additional penalty is 5% of the maximum value of the property held by the trust in the applicable year, with a minimum penalty of $2,500. This also applies to false statements and omissions amounting to gross negligence as well as failure to respond to a CRA demand to file.

HOW CAN WE HELP?

Your Sawatsky Chartered Professional Accountants team can assist you with filing the T3 trust return and associated Schedule 15.

If you would like our assistance, please have the following information ready and contact our office at your earliest convenience:

Please feel free to reach out to us if you have any questions or require further assistance. By phone at 705-329-7700 or email us at info@sawtsky.com

Best regards,

SAWATSKY CHARTERED PROFESSIONAL ACCOUNTANTS

Eliminate confusion at tax time! Be sure that everything is organized and ready for your accountant with this checklist.

Download the Complete 2023 Commentary Here >

 

On March 28, 2023, the Deputy Prime Minister and Finance Minister, the Honourable Chrystia Freeland, presented Budget 2023 – A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future, to the House of Commons.

No changes were made to personal or corporate tax rates or to the inclusion rate on taxable capital gains. Some highlights include the following:

A. Personal Measures

  • Modifications to the alternative minimum tax regime focused on high-income individuals.
  • A one-time grocery rebate equal to two quarterly GST/HST credit payments.
  • Additional flexibility and possibilities with Registered Disability and Registered Education Savings Plans were introduced.

B. Business Measures

  • Modifications to the intergenerational business transfer rules to set requirements for activity by the children in the business and the transfer of control, equity ownership and management from the parents to the children.
  • Introduction of the employee ownership trust structure to provide a mechanism for business owners to transfer ownership in their private corporations to employee groups.
  • Several investment tax credits and other incentives were introduced or modified to encourage investment in clean energy.

C. International Measures

  • Confirmation of the government’s intention to introduce legislation implementing the income allocation rule and a domestic minimum top-up tax applicable to Canadian entities of multinational enterprises consistent with the OECD’s BEPS initiatives.

D. Sales and Excise Tax

  • Increasing the air travellers security charge, limiting increases to alcohol excise duties for one year and adjusting the cannabis excise duty remittance frequency.

E. Other Measures

  • New income-tested dental care program for uninsured Canadians.

F. Previously Announced Measures

  • Intention to proceed with previously announced measures, including those related to excessive interest and financing expenses limitations; reporting rules for digital platform operators; extension of the residential property flipping rule to assignment sales; substantive Canadian-controlled private corporations; the mandatory disclosure rules; the electronic filing and certification of tax and information returns; and GST/HST changes in respect of cryptoasset mining.

Download the Complete 2023 Commentary Here >

BACKGROUND

Effective January 1st, 2022, for the 2022 calendar year, the Underused Housing Tax has been implemented to address the housing crisis and promote the efficient use of residential properties in Canada.

Kindly review the attached UHT – QUICK REFERENCE CHART to determine:

  • ARE YOU SUBJECT TO THE UHT RULES?
  • ARE YOU REQUIRED TO FILE AN ANNUAL RETURN?
  • ARE YOU REQUIRED TO PAY THE UHT?

OVERVIEW

WHAT IS THE UHT?

The UHT is intended to apply to underused housing in Canada owned directly or indirectly and wholly or partly by non-Canadians, and non-permanent residents.

UHT obligations apply to affected owners of residential property in Canada on December 31 of the relevant year. Affected owners include PRIVATE CORPORATIONS, PARTNERSHIPS and TRUSTS even if the property is exempt from tax.

The tax rate is one percent of the property’s value, and affected owners must file a UHT return annually and pay the tax by April 30 of the following year.

The UHT covers various property types, including detached houses, duplexes, triplexes, cottages, semi-detached houses, condominium units, and townhouses. However, it does not apply to quadruplexes, apartment buildings, hotels, motels, or similar establishments.

CLASSIFICATION OF OWNERS

There are three groups of owners:

  • EXCLUDED OWNERS. Excluded owners are exempt from any UHT obligations.
  • AFFECTED OWNERS who must file the UHT return and PAY THE TAX, and
  • AFFECTED OWNERS who must file the UHT return but are ELIGIBLE FOR AN EXEMPTION from the tax.

EXCLUSIONS

WHICH OWNERS ARE EXCLUDED?

Excluded owners include Canadian citizens or permanent residents.

Individuals that hold an interest in the property as a partner of a partnership or as a trustee of a trust are carved out of this exclusion.

THE UHT AFFECTS CANADIANS AS WELL!

Certain exemptions apply, such as individuals owning residential properties.

However, CORPORATIONS, PARTNERSHIPS, and TRUSTS (excluding registered charities) must file a UHT return FOR EACH PROPERTY, even if the property is exempt from the tax. 

Although your property may be exempt from the tax (e.g., rented for more than 180 days per year, under construction, or a vacation property meeting specific criteria), a return must still be filed to state the reason for exemption.

WHAT IS THE UHT CALCULATION?

The tax rate is 1% of the higher amount between:

  • The tax assessment value used by the municipality to determine your property taxes; or
  • The most recent sale price (i.e., your purchase price).

PENALTIES FOR NOT FILING THE UNDERUSED HOUSING TAX RETURN

Many private Canadian corporations, trusts and partnerships will be exempt from the tax, but must still file the return (UHT-2900 Underused Housing Tax Return and Election Form), in order to claim their exemption.

The penalties for affected owners for non-filing are a minimum of:

  • $5,000 per individual per property, or
  • $10,000 for non-individuals
  • In addition to the minimum above penalties, add:
  • 5% of the tax calculated for the calendar year, plus
  • 3% of the tax calculated multiplied by the number of complete months that the return is late.

If you are in the business of constructing and selling residential houses, you are still required to complete a UHT return if you owned the property as of December 31, 2022. However, tax exemptions may apply under specific conditions related to the property’s completion date and sale status.

HOW CAN WE HELP?

Our team at Sawatsky Chartered Professional Accountants can assist you with filing the UHT returns.

If you would like our assistance, please provide the following information for each property:

  • Physical address of the property, property ID used in the land registration system, and property tax/assessment roll number
  • Purchase year and price
  • Property type (e.g., detached house, duplex, triplex, etc.)
  • Current tax assessment value used by the municipality for property taxes

Please refer to the following links for UHT filing:

Many private Canadian corporations, trusts and partnerships will be exempt from the tax, but must still file the return (UHT-2900 Underused Housing Tax Return and Election Form), in order to claim their exemption.

The penalties for affected owners for non-filing are a minimum of:

  • $5,000 per individual per property, or
  • $10,000 for non-individuals
  • In addition to the minimum above penalties, add:
  • 5% of the tax calculated for the calendar year, plus
  • 3% of the tax calculated multiplied by the number of complete months that the return is late.

If you are in the business of constructing and selling residential houses, you are still required to complete a UHT return if you owned the property as of December 31, 2022. However, tax exemptions may apply under specific conditions related to the property’s completion date and sale status.

The new Underused Housing Tax (UHT) imposes a 1% annual tax on the value of residential real estate considered to be vacant or underused that is owned on December 31 of each year. The government indicated that the tax would target property owned by non-Canadians; however, the scope of filing requirements extends to many Canadian entities and individuals, including private corporations, partnerships and trustees of a trust. The first filings and taxes are due on April 30, 2023, but no penalties or interest will be applied for UHT returns and payments that the CRA receives before November 1, 2023.

This summary is intended to be a general guide in determining filing obligations and tax exposure. The specific legislation, regulations and CRA administrative policy should be reviewed for a complete and detailed understanding.

This form is used by rental property owners to report their rental income and expenses for income tax purposes.

This is used to calculate your business or professional income as a self-employed person. Use it if you are the only person in the business (sole proprietorship) or if you are in business with one to five other people (partnership). You’ll mark down your business income, cost of goods sold, and business expenses.

You can deduct expenses for the business use of a workspace in your home, as long as you meet one of the following conditions:

  • it is your principal place of business (>50% business use)
  • you use the space only to earn your business income, and you use it on a regular and ongoing basis to meet your clients, customers, or patients

You can deduct expenses you incur to run a motor vehicle you use to earn business income and sometimes if you are required by your employer to travel during the course of performing your employment duties (see Form T2200​).