A matter of Trust

New trust reporting rules may catch some unawares

Are you the holder or beneficiary of an informal ‘in trust for’ (ITF) account? Are you named on an account or property title with your parent or adult child purely for convenience and/or estate planning purposes? Do you own a home together with your spouse but only one of you is on title? Beware: newly adopted legislation means that you may need to file some extra paperwork this year.

It all started with some draft legislation in 2018 that had an effective date of December 30, 2021. Due to the complexity of the legislation, negotiation, and amendments, this got kicked down the road a few times until ultimately becoming a reality for most trusts this year. Some ITF accounts and some bare trusts with year-ends on or after December 30, 2023 are included in the new legislature.

The new rules are complicated and only apply to very few individuals, so I won’t go into them all here. Mostly they involve collecting quite a bit of additional information and reporting that to the CRA. 

Basically, if you have a trust account (including ITF accounts or bare trusts) established prior to October 1, 2023 and its value exceeded $50,000 at any time in 2023, you will need to provide the CRA with the name, address, birthdate, jurisdiction of residence, and taxpayer ID number of all trustees, beneficiaries, settlors, and anyone else who can exert control or override trustee decisions.

ITF Accounts

There was a time (many decades ago now) when the restrictions on Registered Education Savings Plans (RESPs) were so great and the benefits so little that many of us financial advisors would often recommend that clients hold money in a type of account referred to as an informal trust rather than an RESP. These are often referred to as ITF accounts as the name on the account follows the pattern of “Betty and Barney Rubble ITF Bamm Bamm”, where the ITF stands for “in trust for”.  

A formal trust account must have a settlor (the person who put up the cash), a beneficiary (the person for whom the funds are being set aside), and a trustee (the person who will manage the money for the beneficiary). Formal trusts usually involve a lawyer (for the set up) and an accountant (to prepare tax returns), whereas a simple, ITF account didn’t need that most of the time. Many of us still periodically recommend ITF accounts due to their simplicity and lower cost.

With the improvement of RESPs, the use of ITF accounts has dramatically diminished, but they can still be a viable alternative. Unfortunately, these new steps targeting trusts in general are also capturing informal trusts like ITF accounts, making their use more complicated and costly in many cases. Sadly, the low dollar thresholds that trigger the extra reporting and lack of inflation adjustment of that threshold may cause an unanticipated, unwanted and onerous additional burden if you are the owner of an ITF account. 

To be fair, the government’s desire is simply to increase transparency, but the end result is that you might need to hire an accountant to make sure your taxes are done right.

Joint Accounts

We often come across situations where a client has put their adult child’s name on the title of their principal residence or included them as a joint owner of a bank or investment account. They might have done this for estate planning or to simplify account management. The assets are still 100 percent beneficially owned by the parent, but the adult child is also legally on title. These types of joint accounts are known as “bare trusts”. This is wrought with potential pitfalls if there are multiple beneficiaries but can make a lot of sense if there is only one beneficiary.

While less common, there are also circumstances where only one spouse is on title of a car, a house, or other asset, even though both spouses consider the asset to be common property. This situation would also fall under the same bare trust rules. But with this new legislation comes more cost and more effort. They will need to be reported to CRA.

Long story short

Some of us in the industry fear that the reporting requirements may not be fully understood by many informal trust holders. We fear that account holders may inadvertently face the ire of the CRA by not filing the appropriate paperwork. And the penalties for not filing are nasty. At 5 percent of the market value of the trust and a minimum penalty of $2,500, the penalties are big enough to warrant some special consideration. 

So, if you have an account that you don’t want your adult child to know about because you have set money aside for them that you want to be a surprise, you may now need to spoil the surprise in order to get the information that you need to fulfill this year’s reporting requirements. 

If you know anyone in your life who may possibly have an ITF account for their children, if you have been put on title of a property or a joint account for convenience or estate planning purposes, or if you know anyone who may be involved with a trust of any type, be sure to pass this article on to them. It may save them a substantial amount of money.

If you or they aren’t sure if this applies, make sure to have an accountant or a professional tax preparer review the situation. The small extra expense might just save you thousands of dollars.

“Let everyone be subject to the governing authorities…”  – Paul (in his letter to the Romans)

Arnold Machel lives, works, and worships in the White Rock/South Surrey area. He holds the Certified Financial Planner® designation, is the Founder of Visionvest Financial Planning & Services, and sits on the board of Abundance Canada. Visionvest (his firm) has been voted Best Investment/Financial Advisor by Peace Arch News readers for the past three years in a row.

Questions and comments can be directed to him at dr.rrsp@visionvest.ca. Please note that all comments are of a general nature and should not be relied upon as individual advice. While every attempt is made to ensure accuracy, facts and figures are not guaranteed. 

Sources: 1. Tax – New trust reporting requirements | BDO Canada