Trusts are a powerful tool used in tax and financial planning. The main advantage of a trust is that it allows you to separate the control and management of assets in the trust from its ownership. Trusts have many uses in both family and estate planning and as a tool to administer an estate on the death of an individual.
Currently a trust generally has to file a T3 annual return if it has taxes payable or makes a distribution to one or more beneficiaries. Personal information on trustees, beneficiaries, settlors or other persons are not currently required to be reported to the Canada Revenue Agency (CRA). And certain inactive trusts are exempt from filing a trust return (T3 Return).
However, for taxation years ending on or after December 31, 2021, the 2018 federal budget proposed new reporting requirements for trusts. The changes are meant to improve the collection of beneficial ownership information with respect to trusts and to help the Canada Revenue Agency (CRA) assess the tax liability of trusts and their beneficiaries. The budget also proposed penalties for non-compliance with the new requirements.
For trust taxation years ending on or after December 31, 2021, all non-resident trusts that currently have to file a T3 return and express trusts that are resident in Canada, with certain exceptions, will be required to report additional information as part of their T3 return each year.
New filing requirement
With limited exceptions, the new rules generally require the filing of a T3 return by express trusts that are resident in Canada even if it does not have any income to report. An express trust is generally a trust created with the settlor’s express intent, such as through a trust deed or a will, as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute. This includes trusts such as those created to hold private company shares as part of an estate freeze, and trusts created to hold vacation or other personal property.
Enhanced reporting obligation
Each year, affected trusts must report additional information on all trustees, beneficiaries, settlors, and each person who has the ability to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g., a protector), including:
Date of birth
Jurisdiction of residence
Taxpayer identification number, such as social insurance number, trust account number, business number or taxpayer identification number used in a foreign jurisdiction
This enhanced reporting obligation aims to help the government more effectively counter aggressive tax avoidance, tax evasion, money laundering, and other criminal activities perpetrated through the misuse of trusts. With this in mind, trustees should know that reporting this new information may prove onerous for certain trusts and should plan ahead to be in compliance.
This information should be reported on a new schedule to be filed with the trusts T3 return. Note that affected trusts must file the T3, including the new schedule, and cannot simply file the new schedule on its own even if the trust has no income for the year. In the case of family trusts, this means that they will need to be transparent with respect to all possible beneficiaries, even contingent beneficiaries, of the trust, as well as making annual trust filings in years where there is no distribution of income or capital.
There are exceptions to the new reporting requirements, including:
Trusts that have been in existence for less than three months
Trusts that hold assets not exceeding $50,000 in total fair market value throughout the year (where the only assets are cash, certain government debt obligations, a share, debt or right listed on a designated stock exchange, a share of a mutual fund corporation, a unit of a mutual fund trust, and an interest in a related segregated fund)
Certain regulated trusts, such as a lawyer’s general trust account
Trusts that qualify as non-profit organizations or registered charities
Mutual fund trusts, segregated funds, and master trusts
Graduated rate estates
Qualified disability trusts
Employee life and health trusts
Certain government funded trusts
Trusts under or governed by certain registered plans
Cemetery care trusts and trusts governed by eligible funeral arrangements
Failure to file the T3 Return, including the new schedule of additional information, will lead to the standard penalty of $25 per day (minimum penalty of $100) with a maximum penalty of $2,500. An additional gross negligence penalty of 5% of the highest total fair market value of all the property held by the trust in that year (minimum penalty of $2,500) may also apply.
Trusts that may not have been required to file tax returns in the past will likely be required to file one annually starting in 2021. Although the earliest filing deadline under these new rules is a year away (March 31, 2022 for trusts with taxation years ending on December 31, 2021), trustees should begin gathering information needed to comply with these new rules, as the additional information required may not be readily available.
Please contact us with any questions about the new reporting rules.