By Terrance S. Carter, Theresa L.M. Man and Jacqueline M. Demczur

As we have reported on since June 2023, charities in Canada will unfortunately be faced with having to file separate T3 returns by March 30, 2024, for each internal express trust (such as endowments, scholarships and restricted building funds to name a few) or face significant penalties as a result of the passage of Bill C-32, the Fall Economic Statement Implementation Act, 2022 in December 2022. For a detailed explanation of what the new trust filing obligations involve, please refer to our Charity and NFP Law Bulletin No. 522, as well as to the ongoing updates in our Charity & NFP Law Update in both August 2023 and September 2023.

The charitable sector has been hoping that the Department of Finance (“Finance”) might be prepared to introduce a legislative amendment in the Income Tax Act (“ITA”) to provide an exemption from these filing requirements for internal express trusts held by charities. Such an exemption for charities would be similar to the exemption that has already been proposed by Finance in its draft budget implementation legislation released on August 4, 2023 for express trusts held by the Canadian Wheat Board.

In that regard, lawyers from the charitable sector recently participated in a video meeting with two senior members from the Legislation Policy Branch of Finance to enquire if Finance might be prepared to announce whether a legislative exemption from the trust reporting requirements for internal express charities would be forthcoming. Unfortunately, after considering the matter for over a week following the video meeting, the written response from one of the senior Finance officials was that the official was not able to provide an answer and did not have “a clear timeline” when Finance would be able to provide one.

The same senior official went on to say that “the question was currently under active consideration by CRA,” but did not elaborate what that meant. Possibly, it might indicate that an administrative exemption by the Charities Directorate of the Canada Revenue Agency (“CRA”) from the trust reporting requirements is being considered based upon the fact that the CRA has a policy exempting internal trusts from having to register as separate registered charities, as explained in more detail in our Charity and NFP Law Bulletin No. 522. However, to date, there has been no indication by the CRA that an administrative exemption is under consideration, so any speculation in that regard cannot be relied upon.

Given Finance’s reticence to indicate whether a legislative exemption will be forthcoming, coupled with the lack of any indication by the CRA about whether an administrative exemption is under consideration, charities have been left in a very difficult situation. While they may continue to hope for a legislative fix by Finance or an administrative exemption by the CRA, the reality is that charities no longer have the luxury of waiting for the government to speak on this issue. Instead, charities should be consulting with their legal and accounting professionals now to seek advice on what they will need to do in order to be able to file T3 trust returns by March 30, 2024 for each one of their internal express trusts to avoid significant penalties. There is a limited exception in subsection 150(1.2) of the ITA for trusts that hold less than $50,000 in assets throughout the taxation year, provided that their holdings are confined to deposits, government debt obligations and listed securities.

The due diligence that will be required will include, among other onerous requirements, determining whether each restricted fund is an “express trust” and, if so, identifying the names of all donors (settlors) for each express trust, as well as the said donors’ taxpayer identification numbers. Our Charity and NFP Law Bulletin No. 522 explains what the trust reporting requirements will include in more detail, together with an explanation of the penalty that will apply for failure to comply (i.e. in general terms the greater of $2500 and 5% of the value for each express trust). Directors of charities with internal express trusts should be informed of the pending T3 filing requirements and the applicable penalty, as they have a fiduciary obligation to comply with the law and to protect their charity’s assets from avoidable penalties.

The sector will no doubt want to continue to press the government for a legislative or administrative exemption from the pointless trust reporting requirements of internal express trusts of charities, which hopefully will prove to be successful. However, in the meantime, charities and their boards need to be prudent and get prepared so that they can comply with the trust reporting requirements on a timely basis and, in so doing, avoid very significant penalties.

​Read the October 2023 Charity & NFP Law Update