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Know thy new trust account disclosures

New reporting requirements are in effect, but questions remain, especially in the charity and real estate sectors.

Tax time

As the 2023 tax year draws to a close, lawyers are reminded that reporting obligations concerning trust accounts are now in effect and must be part of tax returns to the Canada Revenue Agency starting on December 31st.

Canada codified new reporting requirements for trust accounts in last year's budget implementation bill (Bill C-32), part of an OECD-wide effort to combat money laundering. A lawyer's general trust account is exempt from the new requirements. However, client-specific trust accounts must file annual tax returns, beginning in the 2023 taxation year.

Terrance Carter, the managing partner of Carters Professional Corporation in Toronto, notes that the requirement to file T3 returns (Trust Income Tax and Information Returnwithin 90 days of the calendar year-end now captures new situations, including matters involving express trusts greater than $50,000.

"There is an exception for charities that are set up as trusts because charities already report in their annual returns," Carter says. "But what was not apparent in Bill C-32 was whether there was an exemption for trusts that were by charities as part of their charitable programs." For example, he cites a university's endowment for scholarships as a restricted charitable purpose trust.

Carter notes that some charities have internal charitable purpose trusts, which are created when a charity receives property as a gift subject to specific legally enforceable terms and conditions. These were not exempted as part of Bill C-32, and would have unnecessarily imposed a mammoth task on many organizations, as internal trusts are already part of the charity's financial statements and reflected in their annual return. 

Carter attributed the confusion to an oversight in drafting, the charitable sector raised the issue with the CRA at the end of June, and the CRA recently announced an administrative exemption for charities who are no longer required to file T3s for internal express trusts.

"Everyone is happy about that, but what is still a factor is that there can be some situations where charities and non-profit organizations may still need to file T3 returns, and those haven't gone away," Carter says, citing express trusts held by a charity for beneficiaries other than the charity itself, or bare trusts held by third parties for the benefit of a charity.

Raymond Leclair, vice president of public affairs at LawPRO, says that for real estate lawyers, the new requirements mainly affect condo transactions but could capture new subdivisions.

"The problem is that real estate lawyers receive these deposits from purchasers which are not their client, on behalf of their client, so there is a whole issue around whose money is it," Leclair says. "It's not their client's money until the deal closes, so there are a bunch of definition issues here."

"There's also an issue in that lawyers are not supposed to be dealing with other lawyers' clients," says Leclair. "Purchasers may have their own lawyers, so is there a breach if the vendor's lawyer is contacting the purchaser directly to get the information that they require in order to do the accounting?"

Leclair adds that some transactions can involve hundreds or thousands of units in a single project, which adds to a huge accounting burden for lawyers.

"That means higher costs for the lawyer, passed onto their client the developer, who at the end of the day passes it onto the purchasers of homes, which is completely contrary to the government's intention to make housing more affordable," Leclair says.

Leclair says that the bar is asking for more clarification on how the requirements would work without lawyers knowing the dates of birth, SINs, or residency statuses of individuals who are not clients. Lawyers' mixed trust accounts have been exempted, so it begs the question of whether these accounts would be considered a mixed trust, given they contain deposits from various purchasers. Or is it considered a trust account for the developer client for a single project?

"Developers are already under the obligation to report the information to FINTRAC, so there seems to be a duplication," Leclair says.

Leclair says the CBA continues to engage the government in the hopes of answers before lawyers file to the CRA.