On March 12, 2024, the Canada Revenue Agency ("CRA") clarified its position on the application of late filing penalties to bare trusts. Bare trusts that fail to meet the filing deadline for the 2023 tax year will only be subject to late penalties if there is gross negligence.
By way of background, recent changes to the Income Tax Act (Canada) brought in new trust reporting rules and expanded the trust filing requirements. As a result, many trusts that did not have to file tax returns in the past, now have filing obligations. The new reporting rules now apply to bare trusts, which were previously mostly exempt from tax filing requirements. A bare trust exists where the trustee can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust's property.
Trusts subject to the new rules with a December 31, 2023 year-end must file a T3 Trust Income Tax and Information Return ("T3") along with the corresponding Schedule 15 Beneficial Ownership Information of a Trust by April 2, 2024.
Failing to file a T3 return by the filing deadline could result in standard late penalties of $25 a day, up to a maximum of $2,500. If a bare trust fails to file the T3 return and does so knowingly, or due to gross negligence, steeper penalties, being the greater of $2,500 and 5% of the highest value of the trust property in the year, may apply.
In December 2023, CRA said that it was providing a grace period for bare trusts only and that there would be no penalties for the late filing of bare trusts for the 2023 tax year. However, CRA also said that if a bare trust fails to file a T3 return and does so knowingly, or due to gross negligence, the trust could be subject to late penalties. This position created additional uncertainty: the late filing penalties could potentially apply to taxpayers who knew of the bare trust reporting requirements, but either could not meet the filing deadline, or were uncertain if the new rules applied to their particular trust arrangements.
On March 12, 2024, the CRA clarified its stance. The CRA is adopting an education-first approach to compliance in 2023, and will only be applying the standard late penalties to bare trusts where there was gross negligence. Thus, bare trusts that fail to file a T3 return for the 2023 tax year by the filing deadline, even if they are aware of the filing obligations, will not be subject to late penalties, provided there was no gross negligence. This clarification brings welcome news for taxpayers, given the significant uncertainty surrounding the new reporting requirements for bare trusts.
Additionally, the CRA clarified that it will only apply the steeper penalties (greater of $2,500 and 5% of the highest value of the trust property) to the most egregious cases where a bare trust fails to file. This would occur only in the context of a compliance action or audit, where all of the circumstances of a particular taxpayer's situation would be considered. The gross negligence penalties will be subject to oversight by CRA Headquarters.
Taxpayers should keep in mind that this penalty relief applies only to bare trusts, and only for the 2023 tax year.
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