New tax requirements - Trust income tax returns (tax years ending after December 30, 2023)

Parliament has enacted new trust reporting requirements for T3 returns filed for taxation years ending after December 30, 2023. This includes the reporting of “Beneficial Ownership Information” (“Schedule 15”).

In this context, we have prepared answers to the questions below:

1. Are all beneficiaries, including the beneficiaries of a discretionary trust, “reportable entities” that must be listed on Schedule 15?
2. What is the consequence (penalty, interest) under the Income Tax Act of failing to include a “reportable entity” on Schedule 15?
3. Are the answers to questions A, and B the same when applying the Quebec Taxation Act (“QTA”)?

All trust beneficiaries, whether applicants or confirmed, must be identified on Schedule 15 of a given trust’s T3.

In fact, the law states:

“204.2(1) For the purposes of subsection 150(1) of the Act, every person having the control of, or receiving income, gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity, shall provide information in respect of a trust, unless the trust is subject to one of the exceptions listed in paragraphs 150(1.2)(a) to (o) of the Act, that includes the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and “TIN” (as defined in subsection 270(1) of the Act) for each person who, in the year,

(a) is a trustee, beneficiary (subject to subsection (2)) or “settlor” (as defined in subsection 17(15) of the Act) of the trust;” (emphasis added)^[1].

Moreover, the term “beneficiary” has a broader definition for the purposes of the Income Tax Act (“ITA”) than that given by the Civil Code of Québec. Subsection 108(1) ITA provides that:

““beneficiary” under a trust includes a person beneficially interested therein” (emphasis added).

The term “beneficially interested” is defined in subsection 248(25) ITA and includes :

“(a) a person or partnership beneficially interested in a particular trust includes any person or partnership that has any right (whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any person or partnership) as a beneficiary under a trust to receive any of the income or capital of the particular trust either directly from the particular trust or indirectly through one or more trusts or partnerships(…)” (emphasis added).

In the explanatory notes accompanying the bill creating section 204.2 ITR, the Minister of Finance (Canada) specified the scope of the new information requirements as follows:

“New subsection 204.2(2) provides that for the purposes of subsection (1), the requirement to provide information in respect of the beneficiaries of a trust is met if

• the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return; and
• for beneficiaries whose identity is not known or ascertainable with reasonable effort by the person making the return, the person making the return provides sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.

For example, the beneficiary of a trust may not be known where the trust provides for a class of beneficiaries that includes the settlor’s current children and grandchildren and any children or grandchildren that the settlor may have in the future. In these circumstances the reporting requirement will be met if the relevant information in respect of all of the settlor’s current children and grandchildren are included as well as the details of the terms of the trust that extend the class of beneficiaries to any of the settlor’s future children or grandchildren.”^[2]

Thus, any person with an immediate or future right, conditional or unconditional, or subject or not to the exercise of discretion by a person is a “reportable entity” required to be listed on Schedule 15. This includes beneficiaries named in the trust deed whose right to receive a portion of the trust’s capital or income is limited to the exercise of the trustees’ discretion.

Generally speaking, the deed of a discretionary family trust includes categories of beneficiaries, such as:

i) [Name of client];

ii) [Client’s name]’s born and unborn children, including Child1, Child2 and Child3;

ii) [Spouse’s name], the spouse of [Client’s name];

iv) any legal entity, constituted or to be constituted, of which the beneficiaries designated above and/or the beneficiaries having been the subject of an option to elect in accordance with article [*] hereinafter hold, individually or collectively, more than fifty percent (50%) of the voting rights of its share capital, with the exception of any legal entity of which a treasury share will be issued to the Trust, as well as its subsidiaries, including in particular [to be completed].”

Each of the client, Child1, Child2, Child3 and spouse are “reportable entities” and must be added to Schedule 15.

Furthermore, the deed of a discretionary family trust generally provides that the trustees may name additional beneficiaries from among the various classes of persons provided for in the deed:

“Subject to the provisions of Article [*], the Trustees shall have the option of electing, at their sole discretion and by notarial deed bearing minute, additional beneficiaries from among the following categories of persons:

i) any future spouse of [Client’s name];

ii) any trust, created or to be created, the sole beneficiaries of which are one or more of the beneficiaries designated in article [*] above or who have been given the option of electing in accordance with this paragraph;

iii) the first-degree children of any future spouse of [Client’s name];

iv) any spouse, present or future, of the first-degree children of [Client’s name];

v) the future second-degree children of [Client’s name];”.

The main articles of the Civil Code of Quebec that apply to this situation are :

” 1279. Only a person having the qualities to receive by gift or by will at the time his right opens may be the beneficiary of a trust constituted gratuitously.
Where there are several beneficiaries of the same rank, it is sufficient that one of them have such qualities to preserve the right of the others if they avail themselves of it.

1280. To receive, the beneficiary of a trust shall meet the conditions required by the constituting act.

1281. The settlor may reserve the right to receive the fruits and revenues or even, where such is the case, the capital of the trust, even a trust constituted by gratuitous title, or to participate in the benefits it procures.

1282. The settlor may reserve for himself the power to appoint the beneficiaries or determine their shares, or confer it on the trustees or a third person.
In the case of a social trust, the trustee’s power to appoint the beneficiaries and determine their shares is presumed. In the case of a personal or private trust, the power to appoint may be exercised by the trustee or the third person only if the class of persons from which he is to appoint the beneficiary is clearly determined in the constituting act.

1283. The person having the power to appoint the beneficiaries or determine their shares exercises it as he sees fit. He may change or revoke his decision for the requirements of the trust.
The person exercising that power may not do so for his own benefit.

1284. While the trust is in effect, the beneficiary has the right to require, pursuant to the constituting act, either the provision of a benefit granted to him, or the payment of the fruits and revenues and of the capital or the payment of one or the other.” (emphasis added)

The deed of a personal trust must set out a list of beneficiaries or classes of persons among whom a faculty of election may be exercised. This right of election may be exercised by the settlor, by a trustee or by a third party. Trusts whose beneficiaries’ rights are conditional on the exercise of an election power are commonly referred to as “discretionary trusts”. In such trusts, no beneficiary can demand anything under art. 1284 C.C.Q. Indeed, no beneficiary of a discretionary trust has any known or acquired right in the trust patrimony. On the contrary, the persons or categories of persons listed in the trust deed are potential beneficiaries (some authors use the expression “postulant beneficiaries”) who must wait for two events: 1) if they belong to a category, for them to be designated by name as beneficiaries, and 2) for income or capital from the trust to be allocated to them. Often, potential beneficiaries are not even aware that a trust has been set up for their benefit. In fact, they are not parties to the trust deed, which requires only the involvement of the settlor and trustees. Indeed, as author Beaulne points out:

“[Our translation] the “postulants” who meet the qualifications proper to the category indicated by the settlor have only a hope of being designated. But they have no rights, even contingent rights; they must wait for the trustee to exercise his or her choice in their favour before their rights arise”^[3] (emphasis added).

Thus, the persons listed in the above example of a trust deed are not beneficiaries of the trust within the meaning of the Civil Code of Québec.

What about under the Income Tax Act? Persons who may potentially fall into any of the above categories are covered by the definition of “beneficiary” for the purposes of the ITA.

These potential beneficiaries are not beneficiaries of the trust, either under the trust deed or under our interpretation of the Civil Code of Québec. Indeed, before becoming beneficiaries within the meaning of the trust deed, the trustees must express their willingness to name this potential beneficiary by notarial deed en minute.

However, under the Income Tax Act, we are of the opinion that the persons listed in the sample trust article above have a future, conditional right subject to the exercise of discretionary power. Indeed, these individuals have no immediate right, but may have a right in the future, since their name is on the list of proposed beneficiaries. Moreover, the fact that their designation is subject to a double condition (their designation by the trustees and their express acceptance) remains a beneficiary right within the meaning of the Income Tax Act. Finally, the fact that a person has no vested interest in the income or capital of the trust does not disqualify that person from being beneficially interested within the meaning of the Income Tax Act.

Each of the persons listed in the sample items above are “reportable entities” and should be added to Schedule 15. If it is not possible to identify them, Part C of Schedule 15 should contain the relevant information for persons included in this item, as well as details of the terms of the trust that extends the class of beneficiaries to these persons. Furthermore, in subsequent years, as individuals become identifiable, it will be necessary to update Part C to identify those individuals who are now identifiable and add them to Part B.

If a person knowingly, or under circumstances amounting to gross negligence, makes – or participates in, assents to or acquiesces in the making of – a false statement or omission in a return required to be filed, or fails to file a return, a new penalty may apply.

This consequence is set out in new subsections 163(5) and (6) of the ITA. The penalty will be equal to the greater of the following amounts:

• 2 500 $ ;
• 5% of the highest total fair market value of all property held by the trust in the year.

In order for the consequences of subsection 163(6) ITA to apply, the person required to file Schedule 15 must have failed to do so, or must have knowingly or under circumstances amounting to gross negligence, made a false statement or omission in the return.

We will not deal with the notion of false statement, but only with that of omission. The provision sets out two conditions for the imposition of a penalty in the case of an omission:

1. The first case is an omission made “knowingly”, i.e., with full knowledge of the facts. In these cases, the person required to provide information under article 204.2 RIR must have concrete and accurate knowledge of his obligation to provide information, and must have failed to do so. It will then be up to the Canada Revenue Agency to demonstrate that the omission was deliberate.
2. The second case involves an omission made in circumstances amounting to gross negligence. In civil law, gross negligence qualifies conduct that “denotes recklessness, imprudence or gross negligence[4]”. In other words, gross negligence is committed by a person who could not have been unaware that he or she was required to file information to identify one or more “reportable entities” within the meaning of the ITA.

In addition, subsection 162(7) ITA applies:

” Every person (other than a registered charity) or partnership who fails

(a) to file an information return as and when required by this Act or the regulations, or

(b) to comply with a duty or obligation imposed by this Act or the regulations

is liable in respect of each such failure, except where another provision of this Act (other than subsection 162(10), 162(10.1) or 163(2.22)) sets out a penalty for the failure, to a penalty equal to the greater of $100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100, during which the failure continues.”

CRA will provide relief to bare trusts by waiving the penalty payable under subsection 162(7) for the 2023 taxation year in situations where the T3 return and Schedule 15 are filed after the filing deadline. For the 2023 taxation year for which the trust’s taxation year ends on December 31, 2023, the March 30, 2024 filing deadline is extended to April 2, 2024, the first business day after the deadline.

This proactive relief applies only to bare trusts and only to the 2023 taxation year.

However, if the failure to file the T3 return and Schedule 15 for the 2023 taxation year was made knowingly or as a result of gross negligence, a different penalty may apply. This penalty will be equal to the greater of $2,500 and 5% of the highest amount at any time during the year of the fair market value of all property held by the trust.

The requirements described above apply in the same way to Quebec, which has harmonized with the rules adopted at the federal level. The “Additional Trust Information” section of Form TP-646 must be completed for any trust resident in Canada, other than a statutory or judgment trust. This information is mandatory for certain trusts, for taxation years ending after December 30, 2023.

The additional information to be provided is listed in Part 5 of Form TP-646 and includes, in section 5.4, the beneficiaries.

As for penalties, if the trust fails to file the tax return containing the additional information requested within the prescribed time, it is subject to a penalty of $1,000 and, starting on the second day, an additional penalty of $100 per day of failure, up to a maximum of $5,000.

Furthermore, Revenu Québec has indicated that irrevocable vesting in favour of one beneficiary will not be sufficient to exclude other beneficiaries from the new disclosure obligations.

The same type of penalty is applicable in Quebec under 59 para. 1 Tax Administration Act:

“Every person who fails to file a return or report as and when prescribed by a fiscal law, a regulation made under such a law or a ministerial order, or who fails to conform with a demand made under section 39, incurs a penalty of $25 for each day during which the failure continues, up to $2,500.”

[1] Section 204.2 of the Income Tax Regulations, C.R.C., c. 945 (“ITR”).

[2] Department of Finance Canada, “Explanatory Notes to Legislative Proposals Relating to the Income Tax Act and Other Instruments”, online: https://fin.canada.ca/drleg-apl/2022/ita-lir-0222-1-n-eng.html (consulted January 15, 2024).

[3] Jacques Beaulne and André J. Barette, Droit des fiducies, 3rd edition, La Collection Bleue, 2015, Wilson & Lafleur, at para. 252; see also Québec (Curateur public) v. A.N. (Succession de), 2014 QCCS 616 (CanLII), <https://canlii.ca/t/g46ls>, at para. 42.

[4] Article 1474 of the Civil Code of Québec.

DISCLAIMER: This publication is intended to provide general information on legal issues and developments as of the date indicated. This information is not legal advice and should not be treated or relied upon as such.