Trust Taxation Canada: T3 Filing Requirements and Compliance Strategies for Ontario Businesses

Trusts have become an increasingly complex area of Canadian tax law, particularly following the 2023 regulatory changes that dramatically expanded T3 filing requirements. For business owners in Mississauga, the GTA, and across Ontario managing family trusts, holding companies, or succession planning structures, understanding trust taxation rules is no longer optionalit’s essential to avoid penalties that can reach $2,500 per filing failure.

The Canada Revenue Agency (CRA) has significantly tightened trust reporting obligations, requiring T3 returns for many previously exempt trusts, including bare trusts that hold real estate or business assets. Whether you’re using trusts for income splitting, estate freezes, or asset protection, staying compliant while optimizing tax efficiency requires specialized expertise.

At Insight Accounting CPA, we help Ontario business owners navigate the intricate landscape of trust taxation, ensuring compliance with new CRA requirements while implementing strategic tax planning that protects wealth across generations.

Understanding Trust Types in Canadian Tax Law

Canadian tax law recognizes several distinct trust structures, each with unique taxation rules and compliance obligations:

Inter Vivos Trusts (Living Trusts)

Inter vivos trusts are created during the settlor’s lifetime and taxed at the highest marginal rate (currently 53.53% in Ontario for 2026) on any income retained within the trust. These trusts are commonly used for:

Income splitting with adult family members
Estate planning and probate avoidance
Business succession structures
Asset protection strategies

Because retained income faces top-rate taxation, most inter vivos trusts distribute income annually to beneficiaries, who report it on their personal returns at their marginal rates.

Testamentary Trusts

Created through a will upon someone’s death, testamentary trusts previously enjoyed graduated tax rates but now face the same top marginal rate taxation as inter vivos trusts following 2016 tax reforms. Graduated rate estates (GREs) receive special treatment for the first 36 months after death, but standard testamentary trusts do not.

Family Trusts

Family trusts are inter vivos trusts designed to hold family business shares or investment assets. They’re instrumental in:

Multiplying the lifetime capital gains exemption across family members
Facilitating estate freezes for business owners
Providing flexibility in distributing capital gains and dividends
Protecting assets from creditors and marital breakdowns

Ontario business owners earning $500,000+ annually frequently use family trusts as the cornerstone of succession planning, particularly when combined with estate freeze transactions and holding company structures our team implements at Insight Accounting CPA.

Alter Ego and Joint Spousal Trusts

Available to individuals 65 and older, these specialized trusts allow:

Alter Ego Trusts: Settlor receives all income during lifetime, avoiding probate on assets while maintaining control
Joint Spousal Trusts: Income to settlor or spouse during both lifetimes, with probate avoidance

Both trigger deemed disposition at the death of the settlor (or surviving spouse for joint spousal trusts), but they offer significant estate planning advantages for high-net-worth Ontario families.

Bare Trusts

Bare trusts hold legal title to property while beneficiaries maintain beneficial ownership and control. Common examples include:

Parents holding property for adult children
Nominee arrangements for real estate
Certain holding structures for business assets

Critical 2023 Change: Bare trusts previously exempt from T3 filing now face mandatory reporting requirements, catching many Ontario business owners by surprise.

The 2023 Trust Reporting Revolution: What Changed

The 2023 taxation year brought the most significant expansion of trust reporting requirements in Canadian history. The CRA’s new rules dramatically increased the number of trusts required to file T3 returns and Schedule 15 (Beneficial Ownership Information).

New Filing Requirements

Starting with the 2023 tax year, trusts must file T3 returns and disclose:

All trustees, beneficiaries, settlors, and controlling persons
Detailed beneficial ownership information (Schedule 15)
Each person’s name, address, date of birth, jurisdiction of residence, and TIN

Previously Exempt Trusts Now Required to File

The new rules eliminated exemptions for many trusts, including:

Bare trusts (the most significant change affecting Ontario property owners)
Trusts with minimal activity previously under filing thresholds
Certain trusts that held assets without distributing income

Limited Exemptions Remaining

Only specific trust types remain exempt, including:

Trusts in existence less than three months
Graduated rate estates within the 36-month window
Qualified disability trusts
Registered plans (RRSPs, TFSAs, RESPs)
Lawyers’ general trust accounts
Trusts governed by specific legislation

GTA Impact: Many Mississauga and Toronto-area business families using bare trust arrangements to hold real estate or corporate shares discovered in 2024 that they should have filed T3 returns for 2023potentially facing late-filing penalties.

T3 Filing Requirements, Deadlines, and Penalties

Filing Deadlines

Standard trusts: 90 days after the trust’s tax year-end
Graduated rate estates: March 31 following the calendar year (if calendar year-end)
Most inter vivos trusts: December 31 year-end, making the deadline March 31

Information Required

T3 returns must include:

Trust income, deductions, and distributions to beneficiaries
Capital gains and losses
Schedule 15: Beneficial ownership of all trustees, beneficiaries, settlors, and persons with control
Provincial allocation of income
Tax payable (if income retained)

Penalties for Non-Compliance

The CRA imposes substantial penalties for T3 filing failures:

Late filing: $25 per day (minimum $100, maximum $2,500)
Failure to file Schedule 15: $25 per day (minimum $100, maximum $2,500)
Gross negligence: 5% of maximum trust value, minimum $2,500
Repeat failures: Penalties double for subsequent failures

Ontario Context: With thousands of bare trusts and family trusts across the GTA facing these new requirements, the CRA has collected significant penalty revenue from business owners unaware of the 2023 changes. Proactive compliance is considerably less expensive than retroactive penalties.

The 21-Year Deemed Disposition Rule

One of the most significant tax events affecting inter vivos trusts is the 21-year deemed disposition rule, which treats trusts as having disposed of all capital property every 21 years at fair market value.

How It Works

Every 21 years from trust creation, the trust is deemed to have sold all capital property
Capital gains are triggered and taxed at the top marginal rate
The trust receives a corresponding increase in the adjusted cost base
This prevents indefinite deferral of capital gains across generations

Planning Strategies

Sophisticated trust planning addresses the 21-year rule through:

Distribution Planning: Distributing appreciated property to beneficiaries before the 21-year mark (using rollover provisions where available)

Timing Trust Creation: Strategic timing to align the 21-year anniversary with anticipated business sales or other liquidity events

Resettlement Strategies: In some cases, restructuring trusts to manage timing (requires careful legal and tax analysis)

Reserve Funds: Maintaining liquidity to pay tax on deemed dispositions if property cannot be easily distributed

Life Insurance: Using insurance proceeds to fund the tax liability at the 21-year mark

For Ontario business owners with family trusts holding appreciated corporate shares, planning for the 21-year rule is essential. Our succession planning team at Insight Accounting CPA regularly models these scenarios when structuring estate freezes and family trust arrangements.

Trust Taxation Rates and Income Splitting Opportunities

Taxation of Retained Income

Trust income that isn’t distributed to beneficiaries faces taxation at the highest marginal rate:

Ontario 2026 top rate: 53.53% on regular income
Capital gains: Taxed at 26.77% (50% inclusion rate on first $250,000, 66.67% above)
Eligible dividends: Approximately 39.34%
Non-eligible dividends: Approximately 47.74%

This punitive taxation on retained income creates a strong incentive to distribute trust income annually to beneficiaries.

Income Splitting Strategies

When income is distributed to beneficiaries, it’s generally taxed in their hands at their marginal rates, creating opportunities for tax savings:

Example: A family trust distributes $50,000 to an adult child in a lower tax bracket (30% marginal rate vs. parent’s 53.53% rate), saving approximately $11,765 in annual taxes.

Tax on Split Income (TOSI) Rules

The TOSI rules restrict income splitting with family members, particularly:

Minor children (with limited exceptions for certain capital gains)
Adult family members who don’t meet “excluded share” or “reasonable return” tests

Critical for Ontario Business Owners: TOSI applies to private company shares held by family trusts, requiring careful structuring to ensure distributions qualify as excluded amounts. This involves demonstrating:

Substantial contributions to the business (20+ hours weekly)
Arms-length capital contributions
Ownership of excluded shares (meeting specific tests)

The intersection of family trusts, holding companies, and TOSI rules requires specialized expertisegeneric tax advice often results in reassessments and penalties.

Using Trusts in Business Succession and Estate Planning

For Mississauga and GTA business owners, trusts serve as powerful succession and estate planning tools when properly structured.

Estate Freeze Transactions

A classic structure combines:

Freeze shares: Founder exchanges common shares for fixed-value preferred shares
Family trust: Subscribes for new common shares (often for nominal value)
Future growth: Accrues to family trust beneficiaries rather than founder
Lifetime capital gains exemption: Potentially multiplied across family members when shares are eventually sold

Tax Benefits:

Caps founder’s estate value at current business valuation
Future growth taxed in hands of lower-income family members
Potential LCGE multiplication (over $1 million per beneficiary for qualified small business shares)
Flexibility to allocate capital gains among beneficiaries

Probate Avoidance

Trust assets don’t pass through the estate, avoiding:

Ontario estate administration tax (1.5% on assets over $50,000)
Public disclosure of asset values
Delays in estate settlement

Creditor Protection

When properly structured, trust assets may receive protection from:

Business creditors (if transfers occurred before claims arose)
Matrimonial property division (for beneficiary spouses who haven’t controlled distributions)
Professional liability claims

Ontario Legal Context: Asset protection through trusts requires compliance with fraudulent conveyance laws and careful timingtransfers made to defeat existing creditors can be reversed.

Succession Flexibility

Family trusts provide unique flexibility:

Income and capital can be distributed among beneficiaries based on changing circumstances
Multiple generations can be beneficiaries
Trustees can adjust distributions based on beneficiaries’ tax situations, life stages, and needs
Shares can be distributed to active family members while providing for inactive members

Our team at Insight Accounting CPA regularly structures these arrangements for Ontario business families, ensuring legal compliance while optimizing tax efficiency.

Common Trust Compliance Mistakes Ontario Business Owners Make

1. Failing to File T3 Returns for Bare Trusts

The Mistake: Assuming bare trust arrangements holding property don’t require T3 filing.
The Reality: Since 2023, bare trusts must file T3 returns with Schedule 15, even with no income or distributions.
The Cost: $2,500+ in penalties per year of non-filing.

2. Not Maintaining Proper Trust Documentation

The Mistake: Informal trust arrangements without proper trust deeds, resolutions, or beneficiary designations.
The Reality: The CRA requires evidence of valid trust creation and operation. Without documentation, arrangements may be disregarded or recharacterized.
The Cost: Loss of tax benefits, reassessments, penalties, and potential attribution of income to the settlor.

3. Ignoring TOSI Rules for Family Trust Distributions

The Mistake: Distributing dividends or trust income to adult family members without ensuring TOSI compliance.
The Reality: TOSI can result in top-rate taxation (53.53%) on amounts that don’t qualify as excluded amounts.
The Cost: Significant tax reassessments, interest, and penaltiesoften discovered years later during CRA audits.

4. Missing the 21-Year Deemed Disposition

The Mistake: Not planning for the 21-year anniversary of trust creation.
The Reality: Deemed disposition creates a tax liability even without actual asset sales.
The Cost: Unexpected tax bills potentially requiring asset liquidation or creating cash flow problems.

5. Improper Trust Year-End Selection

The Mistake: Not aligning trust year-ends with tax planning objectives.
The Reality: Trust year-ends affect:

When income is reported by beneficiaries
Timing of distributions for tax purposes
Coordination with corporate year-ends

The Cost: Missed tax planning opportunities and potential double taxation.

6. Self-Dealing and Attribution

The Mistake: Settlors maintaining too much control or benefit from trust assets, triggering attribution rules.
The Reality: Income may be attributed back to the settlor if:

They receive benefits from trust property
They can dictate trust income use
Proper consideration wasn’t provided

The Cost: Complete loss of income splitting benefits.

7. Inadequate Record-Keeping

The Mistake: Not maintaining detailed records of trust income, expenses, distributions, and beneficiary allocations.
The Reality: The CRA can deny deductions and tax treatment without proper documentation.
The Cost: Reassessments, lost deductions, and penalties during audits.

How Insight Accounting CPA Helps with Trust Tax Planning and T3 Compliance

At Insight Accounting CPA, we provide comprehensive trust taxation services tailored to Ontario business owners operating in Mississauga, Toronto, and throughout the GTA:

Trust Compliance Services

T3 Return Preparation: Complete preparation of T3 returns, including Schedule 15 beneficial ownership reporting
Bare Trust Compliance: Identifying bare trust relationships and ensuring proper CRA reporting
Multi-Jurisdictional Trusts: Handling trusts with beneficiaries or assets in multiple provinces or countries
Late-Filing Resolution: Voluntary disclosure programs for previously unfiled T3 returns

Strategic Trust Tax Planning

Estate Freeze Structures: Designing and implementing estate freezes using family trusts and holding companies
TOSI Compliance: Ensuring family trust distributions qualify under excluded amount tests
21-Year Planning: Modeling and preparing for deemed disposition events
Income Splitting Optimization: Maximizing after-tax wealth through strategic distributions

Integration with Business Planning

We coordinate trust planning with broader business and tax strategies, including:

Fractional CFO services that model trust structures within overall succession plans
Tax planning that optimizes corporate and personal taxation alongside trust income
AI-powered tax optimization through our AI advisory services, using advanced analytics to identify opportunities and risks

Accounting Intelligence Approach

Our “Accounting Intelligence” methodology applies to trust taxation through:

Proactive compliance monitoring: Tracking filing deadlines, rule changes, and CRA guidance
Scenario modeling: Projecting tax outcomes under different distribution strategies
Risk assessment: Identifying TOSI, attribution, and compliance risks before they become problems
Multi-year planning: Coordinating trust, corporate, and personal taxation across tax years

Why Ontario Business Owners Choose Insight Accounting CPA

Specialized Expertise: Deep knowledge of Ontario and Canadian trust taxation for business families
CPA-Led Service: Every engagement overseen by Bader A. Chowdry, CPA, CA, LPA
Business Owner Focus: We understand the unique needs of entrepreneurs earning $500,000+ annually
Proactive Approach: We identify opportunities and risks before they affect your bottom line
Integrated Strategy: Trust planning coordinated with corporate structure, succession planning, and wealth management

Trust taxation isn’t a set-it-and-forget-it areait requires ongoing monitoring, annual compliance, and strategic adjustments as tax laws, business values, and family circumstances change.

Take Control of Your Trust Tax Compliance

The 2023 trust reporting changes have created a compliance minefield for Ontario business owners. Whether you’re managing a family trust, have bare trust arrangements, or are considering trusts for succession planning, expert guidance is essential.

Don’t wait for CRA penalties to discover compliance gaps. Contact Insight Accounting CPA today for a comprehensive trust tax review.

Call us at (905) 270-1873 to schedule a consultation and ensure your trust structures are both compliant and tax-efficient.

Frequently Asked Questions About Trust Taxation in Ontario

Do I need to file a T3 return if my trust had no income in 2023?

Yes, if your trust doesn’t qualify for a specific exemption. The 2023 rule changes eliminated the exemption for trusts with minimal activity. Even bare trusts holding property without generating income must file T3 returns with Schedule 15 beneficial ownership information. Failure to file can result in penalties of $2,500 per year, regardless of whether the trust earned income.

What is the penalty for not filing Schedule 15 with my T3 return?

Schedule 15 (Beneficial Ownership Information of a Trust) carries its own penalty structure: $25 per day of late filing, with a minimum penalty of $100 and a maximum of $2,500. This penalty applies separately from the T3 return penalty, meaning a trust that fails to file both could face up to $5,000 in penalties for a single year. Gross negligence or repeated failures can result in even higher penalties.

Can I still use a family trust for income splitting after the TOSI rules?

Yes, but with important limitations. Family trusts remain effective for income splitting when distributions qualify as “excluded amounts” under the Tax on Split Income (TOSI) rules. This typically requires that adult family members either: (1) contribute substantially to the business (generally 20+ hours per week), (2) own “excluded shares” meeting specific tests, or (3) have made arms-length capital contributions. Minor children face stricter limits, though certain capital gains may qualify. Proper structuring and documentation are essentialgeneric approaches often fail CRA scrutiny.

What happens if I miss the 21-year deemed disposition deadline for my family trust?

The 21-year deemed disposition occurs automatically by lawthere’s no “deadline” to miss in terms of triggering the event. However, the trust must report the deemed disposition on its T3 return and pay the resulting capital gains tax. Missing the tax filing or payment deadline results in penalties and interest. The tax liability is calculated as if all trust property was sold at fair market value, potentially creating significant tax bills. Planning aheadideally several years before the 21-year anniversaryallows for strategies like distributing property to beneficiaries or ensuring adequate liquidity to pay the tax.

How do I know if my property holding arrangement is a bare trust that needs to file a T3?

A bare trust exists when one person (the trustee) holds legal title to property, but another person (the beneficiary) has complete beneficial ownership and control. Common examples include: parents holding property title for adult children, nominee shareholders holding shares on behalf of beneficial owners, or certain joint ownership arrangements. If you’re holding title to property for someone else who has full rights to the property and its income, you likely have a bare trust requiring T3 filing. Because these arrangements are sometimes informal, many Ontario property owners don’t realize they’ve created a trust. A qualified CPA can review your specific situation to determine filing obligations.

*By Bader A. Chowdry, CPA, CA, LPA | Insight Accounting CPA*

Ready to optimize your trust tax strategy? Call (905) 270-1873 or visit insightscpa.ca to schedule your consultation with Ontario’s trust taxation specialists.