We previously sent out articles about the new expanded trust reporting rules and the new form Schedule 15 (as part of the T3 trust reporting) that will require certain trusts to file tax returns and provide information about “reportable entities,” which include beneficiaries, trustees, settlors and persons with the ability to exert influence over trustee decisions (“protectors”) of a trust. The first reporting under these rules will be March 30, 2024 (not March 31, 2024, due to 2024 being a leap year).

Trust accounts for lawyers

Lawyers are in a unique situation in that they often have trust accounts for their clients. The legislation exempts a lawyer’s general trust account. These would be funds that are required under the professional conduct rules ⁠–⁠ as well as federal or provincial rules ⁠–⁠ for a purpose that is regulated under these rules. However, all trust accounts are not created equal.

Trust funds that are not exempt

Trust accounts that would not be exempt could be the following:

• Retainer funds
• Trust settlement amounts
• Proceeds from the sale of real estate
• Withholding taxes being kept in trust until the Canada Revenue Agency (CRA) provides a compliance certificate
• Investment funds being administered by the lawyer on behalf of the client(s)

Possible exemptions

For those trust accounts not automatically exempt, they could be exempt if they meet one of the following conditions:

1. The trust account has been in existence for less than three months as of December 31 of the year in question
2. The trust owns property with a fair market value of less than $50,000 throughout the taxation year. The assets can only be:
   1. Cash
   2. Certain debt obligations, and
   3. Listed securities, such as public companies, mutual funds and segregated funds

Information to be reported

• Trustees: The lawyer or law firm
• Beneficiaries: Those for whom the funds are being held
• Settlors: Entities/individuals who transferred in the funds
• Any individual with the ability to influence a trustee’s decision ⁠–⁠ this could be an advisor who is not a trustee, beneficiary or settlor

The information that will have to be provided for each of the above is:

• Name
• Type of entity
• Address
• Date of birth (if applicable)
• Jurisdiction of residence
• Taxpayer identification number (e.g., Social Insurance Number, business number, trust account number or taxpayer identification number used in a foreign jurisdiction)

Filing notes

If an entity ceased to be a reportable entity in the tax year, the information is still required but won’t be carried forward to the next tax year. That is, if there was a trust account in existence for six months during the year, it would have to be reported even if it didn’t exist as of December 31 of the year in question. It is the CRA’s position the trustees must make best efforts to obtain required information from beneficiaries.

There is a section of the form to provide information about beneficiaries the trustee cannot list by name. This could be relevant where trust funds are being held as part of a lawsuit where the beneficiaries of the funds have not yet been determined.

Penalties for non‑compliance

Failure to file penalties

Failure to file the required information discussed above will result in a penalty of $25 per day, with a minimum penalty of $100 to a maximum of $2,500.

Additional penalties

If it is deemed the failure to file was made knowingly or because of gross negligence, there were false statements or a failure to respond to a CRA demand to file, there will be an additional penalty equal to the greater of $2,500 or 5% of the fair market value of all the property held by the trust. As an example, if there are funds with a fair market value of $20 million held by the trust, this gross negligence penalty could be $1 million per year!

The cost of non-compliance is significant. If you think you or your firm would be affected by these rules, please contact us.

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