Catching a Family Trust Before the New Filing Rules Bit

The situation

Amalia and Simran are sisters, both office managers, and both named as trustees on a family trust their father set up more than a decade ago. The trust holds a small residential rental building in Timmins along with an investment account, and it was designed to eventually pass value to the sisters' children — including Amalia's daughter Marcia, the eldest of the group — once they reached adulthood. For years the trust sat quietly in the background. No tax return had ever been filed for it, because for most of its life it didn't need one — small family trusts with little or no income often fell outside the filing requirements entirely.

That changed. Amalia came across a notice from her accountant's newsletter mentioning that Canada had expanded who has to file a trust return, and that the changes now swept in trusts that used to be ignored, including ones like theirs that held real property and investments but distributed little or no income in a given year. She wasn't sure whether it applied to them, and she wasn't willing to guess. She booked a call with our team along with her sister, who as co-trustee shared the same legal exposure.

Neither sister had ever thought of herself as someone who dealt with trust law. Amalia managed a small office and handled her own household's taxes without much difficulty; Simran did the same. Between them, the trust their father had set up felt like a piece of paperwork from his estate planning rather than an ongoing legal obligation either of them was actively responsible for. That assumption, reasonable enough when the trust genuinely had nothing to file, was exactly what the expanded rules had quietly overtaken.

What the review found

Our review confirmed the trust was squarely caught by the new rules. Under the expanded trust reporting requirements, most express trusts resident in Canada — trusts deliberately created, as opposed to ones that arise automatically by operation of law — now have to file an annual T3 trust income tax return, along with an additional schedule disclosing the identity of every trustee, beneficiary, and anyone with the power to control or direct the trust's assets. This applied even though the trust had no income to report that year and had never filed before.

The stakes were real. The trust's assets — the rental building and the investment account together — were worth roughly $1.3 million. In serious cases of non-compliance, such as a knowing or reckless failure to file, the expanded rules allow for a penalty calculated as a percentage of the highest value the trust's property held during the year, or a flat minimum amount, whichever is greater. If a case that severe were ever made out against a trust this size, that percentage-based exposure alone could reach roughly $65,000 — on top of the smaller, more routine late-filing penalties that apply regardless of intent, and the possibility of penalties across more than one missed filing year, since the requirement had already been in force for a prior tax year the sisters hadn't filed for either.

Neither sister had any idea. Their father had drafted the trust deed with a lawyer at the time it was created, but nobody had revisited it since, and nothing about their father's original instructions had flagged an ongoing annual filing duty — because at the time, there wasn't one. The trust wasn't doing anything wrong. It had simply been overtaken by a change in the law that neither trustee had reason to know about, and that most small family trusts of this kind — the sort set up by a parent to hold one property for the next generation, without any ongoing tax return in prior years — were, by and large, just as unlikely to have caught this particular change in the law on their own.

What we did

1. Confirmed the trust's filing status under the current rules. We reviewed the original trust deed, the property records for the rental building, and the investment account statements to establish exactly what the trust held, who the trustees and beneficiaries were, and whether any of the narrow exemptions from the expanded reporting rules applied — for instance, trusts holding only nominal assets, or certain registered accounts. None of those exemptions fit a family trust holding real property and an investment account, so a full filing obligation was confirmed rather than assumed.
2. Identified every person who had to be disclosed. The new beneficial ownership schedule required naming not just Amalia and Simran as trustees, but every beneficiary — including the sisters' children — and confirming there was no other person, such as a protector or someone with a veto over investment decisions, who held effective control over trust decisions. We worked with the sisters to gather the full legal names, addresses, dates of birth, and tax numbers CRA requires for each person named on the schedule.
3. Prepared and filed the outstanding trust return. We prepared the T3 return and the accompanying beneficial ownership schedule for the year that was still open, filing before the deadline rather than after it, and confirmed the trust had no taxable income to report so the return was purely an informational filing. Filing on time, rather than relying on relief after the fact, meant the sisters never had to argue for penalty relief at all — the question simply never arose.
4. Addressed the earlier missed year. For the prior year that had also technically required a filing, we filed a late return alongside a written request to CRA explaining the circumstances — a first-time, good-faith gap arising from a change in the law neither trustee had reason to know about, rather than any attempt to avoid reporting. CRA has discretion to cancel or waive penalties in appropriate circumstances, and a voluntary, well-documented catch-up filing, made before any CRA inquiry arrived, put the trust in the strongest possible position to receive that relief.
5. Set up an ongoing compliance routine. We gave the sisters a simple annual checklist covering what documents to gather each year and a calendar reminder well ahead of the filing deadline, since the expanded rules mean the trust now has to file every year going forward regardless of whether it earns any income, for as long as it continues to hold property and exist as a trust.

The outcome

The current-year return and beneficial ownership schedule were filed before the deadline, which meant no penalty exposure arose for that year at all. CRA accepted the late filing for the prior year without assessing a penalty, treating it as the kind of one-time, good-faith correction the relief provisions are meant to cover. The steep, worst-case exposure that applies to knowing or reckless non-compliance — the kind of penalty that could have reached tens of thousands of dollars against a trust holding roughly $1.3 million in property — never came into play, because the trust was brought into compliance voluntarily before CRA had any reason to treat the gap as anything other than an honest one.

Both returns were processed without further correspondence from CRA beyond a standard acknowledgment, and the trust's filing record is now current for every year the expanded rules have applied. Neither sister had to personally answer for the missed year, since the disclosure was made proactively rather than in response to any CRA letter or audit notice, which is the distinction that tends to matter most when penalty relief is being considered.

Beyond the immediate filing, the sisters came away with something more durable: a clear understanding of what the trust actually requires of them every year, and a standing reminder system so the next deadline doesn't sneak up on them. Amalia described it afterward as the difference between a trust that quietly ran itself and a trust that someone actually had to look after — and now they knew which one they had, and what looking after it meant in practice each spring.

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