Many practitioners have been addressing the challenges of the new trust reporting requirements, especially as they have imposed filing requirements on a vast array of arrangements commonly described as “bare trusts”. While CRA had indicated that there would be some penalty relief for bare trusts, the phrasing was not very comforting for many advisors.
On March 12, 2024, CRA updated Questions 3.5 and 3.6 on their FAQ webpage New reporting requirements for trusts: T3 returns filed for tax years ending after December 30, 2023.
The exact text of CRA’s Questions 3.5 and 3.6, on this penalty relief, is reprinted below.
3.5. Will the CRA provide any relief for penalties if a bare trust does not file their 2023 T3 Return and Schedule 15 by the filing deadline as required?
As some bare trusts may be uncertain about the new requirements, the CRA is adopting an education-first approach to compliance and providing relief to bare trusts by waiving the penalty payable under subsection 162(7) of the Income Tax Act for the 2023 tax year in situations where the T3 Return and Schedule 15 are filed after the filing deadline for reasons other than gross negligence. For the 2023 tax year, where the tax year of the trust ends on December 31, 2023, the filing deadline of March 30, 2024, is extended to April 2, 2024, the first business day after the deadline.
This proactive relief is for bare trusts only and only for the 2023 tax year.
While the Act also includes a gross negligence penalty under subsection 163(5), as part of the CRA’s education-first approach, the CRA will only apply this penalty in the most egregious cases where a bare trust fails to file. Imposing such a penalty would only occur in the context of a compliance action, such as an audit, where all factors and circumstances of the taxpayer’s particular situation are considered together. A gross negligence penalty for failing to file will be subject to oversight and approval by Headquarters, following a mandatory referral.
Under the Act, the gross negligence penalty is equal to the greater of $2,500 and 5% of the highest amount at any time in the year of the fair market value of all the property held by the trust.
3.6. Why is the relief of penalties for the 2023 filing year only applicable to bare trusts?
Bare trusts did not have an obligation in years prior to the 2023 tax year to file a T3 Return, and the CRA recognizes that the 2023 tax year will be the first time that bare trusts will have a requirement to file a T3 Return including the new Schedule 15.
Thank you to the tax team at CPA Canada for their ongoing efforts in addressing the need for a broader statement on penalty relief with CRA.
