The Canada Revenue Agency has clarified on November 10, 2023 that charities are not required to file T3 information returns for internal trusts. Please see our November 10, 2023 Social Impact Newsletter article for more information.
As part of seeking to prevent inappropriate tax avoidance using trusts, the Federal Department of Finance recently introduced new trust reporting rules that will apply beginning at the end of 2023. These rules are designed to increase transparency by requiring trusts to report on their settlors, beneficiaries and trustees and to file T3 information returns beginning in the spring of 2024. There are significant financial penalties for not complying with the new obligations.
A concern has developed in the charitable sector that these rules will apply to trusts held within registered charities. While the new rules explicitly exempt trusts that are registered charities, they are silent on trusts that are held within registered charities. It is quite common for charities to receive gifts that require the gift capital to be held in trust and used to produce income for some element of the recipient charity’s purposes. On a plain reading of the new trust reporting rules, charities would need to file a T3 return and report on each of their internal trust funds. Some large charities have hundreds or even thousands of funds that may be trusts – consider a major university with a large number of scholarship funds or a community foundation with many specific endowments. These charities will have to examine each fund to determine if it is a trust and then consider how to report on those that are trusts.
Registered charities already file T3010 information returns that attach financial statements. Assets in internal trusts have always been included in these returns. If more information is desired by the federal government on internal trusts within registered charities, expanding the questions asked in the T3010 is always possible and would not require registered charities to file a large number of superfluous T3 tax returns and new trust information returns. We in fact understand that a revised T3010, to be released in early 2024, will likely include such questions.
Prior to the new trust reporting rules, the Canada Revenue Agency (“CRA”) took the very sensible administrative position that trusts held within registered charities did not need to file T3s or obtain separate charitable registration to be tax exempt despite technical arguments that could have supported these requirements. We do not see any reason why this prior sensible CRA administrative position would need to change to accommodate the new trust reporting rules.
We acknowledge that the trust reporting rules do not on their face exempt internal trusts held in registered charities and that the CRA could therefore seek to apply the new requirements. However, the CRA did not apply the similar but lesser burden of the prior rules so we do not see a policy reason why it should do so now.
The charitable sector has been seeking clarification from the CRA and the Department of Finance on the scope of the application of these new rules. It appears that the Department of Finance may not have intended to catch internal trusts held by charities and there may be further clarification to come before the rules take effect. If the CRA could confirm the continued application of its past administrative position that trusts held within registered charities for their purposes are not separate taxpayers required to comply with trust reporting rules or to have separate charitable registration, that would be very helpful. Otherwise the Department of Finance should amend the trust reporting rules to confirm this result.
Our discussions with the Department of Finance confirm that they are now aware of the above issues and are considering how to respond. Registered charities should keep a watching eye on this issue.
If nothing has come from the CRA or the Department of Finance by mid Fall of 2023, then registered charities should begin to examine their internal funds to determine which of them are really trusts (and not all will be!) and to collect the information that will be required in the unfortunate event that the non-application of the trust reporting rules has not been confirmed. If necessary, we can assist with determining what funds need to be reported on.
In conclusion, registered charities may need to comply with administratively burdensome and largely pointless new trust reporting obligations on their internal trust funds. However, we are hopeful that CRA and the Department of Finance will clarify that this is not necessary. We feel that it is reasonable for charities to delay moving into compliance with these new rules for a few more months to give the government the opportunity to do the right thing.
Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Social Impact Group.
