Are you holding funds in a separate trust account for a client? Perhaps as security for a builder’s lien, from an estate or trust distribution, or from the sale of real estate? Did you know that you will now need to file a T3 income tax return, unless exempt, for that trust account by the end of March 2024?
New rules in the federal Income Tax Act (ITA) will require T3 returns to be filed for many types of trusts for taxation years ending on or after December 31, 2023. Multiple T3 returns may need to be filed by a single law firm, and each can take considerable time to prepare.
Here is a general summary of the recent changes for 2023 and subsequent years:
- Trustees of Canadian-resident express trusts will, unless exempted, be required to file a T3 income tax return for the trust. The T3 return filing requirement will apply even if the trust is dormant or has no taxable income. Trustees of “bare trusts” are now also subject to that filing obligation (s.150(1.3) ITA).
- For lawyers, separate T3 returns will need to be filed for certain trust accounts maintained for a particular client or clients (s.150(1.2)(c) ITA) unless exempt. Exceptions from that filing requirement are limited, but include trusts that have been in existence for less than three months at the end of the year (s.150(1.2)(a) ITA) and trusts that hold only assets with a total fair market value that does not exceed $50,000 throughout the year (s.150(1.2)(b) ITA).
- In addition to the information ordinarily required to complete a T3 return – which can be significant – detailed personal information (including SINs, jurisdictions of residence and dates of birth) is now required to be provided for trustees, beneficiaries and settlors of trusts, as well as for persons with the ability to “exert influence” over trustee decisions regarding the appointment of income or capital of the trust (ss.204.2(1) and 204.2(2) Income Tax Regulations (ITR)).
- Information subject to solicitor-client privilege need not be disclosed (s.150(1.4) ITA). However, what information is protected by solicitor-client privilege may not always be clear, and may take time to determine. For example, the name of your client and information with respect to the trust account could be privileged in certain circumstances. Discuss with your client and obtain your client’s consent. In the event you are unable to obtain your client’s consent to produce information that may be privileged, you may wish to contact Michael Lucas, KC (at mlucas@lsbc.org or 604.443.5777).
- A T3 return will not need to be filed for:
- a lawyer’s general trust account (s.150(1.2)(c) ITA);
- a trust that has existed for less than three months at the end of the year (s.150(1.2)(a) ITA); or
- a trust that holds assets with a total fair market value that does not exceed $50,000 throughout the year, if the only assets held by the trust throughout the year are one or more of the assets set out in s.150(1.2)(b) ITA.
Exemptions for additional types of trusts are set out in s.150(1.2) ITA.
- Penalties for non-compliance can be severe. At minimum, a penalty of $25 per day of delinquency, to a maximum of $2,500, per return may be imposed (s.162(7) ITA). In addition, in certain circumstances there is an additional penalty that can be as much as 5% of the maximum fair market value of the trust’s property during the year (s.163(6) ITA). There is no coverage under your indemnity policy for penalties.
The above is only a high-level summary. In all cases, the provisions of the ITA and ITR or a qualified tax professional should be consulted.
What can you do?
- Proactively discuss these new trust filing requirements with your clients. When doing so, collect the personal information required to complete the T3 return (e.g., their SIN, date of birth, etc.), or the personal information of any other person who is subject to the new reporting requirements.
- Consider alternative arrangements that obviate the need for you to hold funds in a segregated trust account. For example, consider whether payments into court or an account at a bank in the client’s name would be appropriate.
- Ensure appropriate internal procedures are established. For example, consider engaging an accountant or other tax preparer to complete and file any necessary T3 returns, and make it clear that they are taking on this responsibility.
This document is shared as educational material. It is not intended to constitute legal advice and should not be relied upon for those purposes.