Starting 2021, new trust income tax return filing and information reporting requirements will come into effect for most Canadian trusts. Non-resident trusts that are required to file a T3 trust tax return are also subject to the new rules. The changes were announced in the 2018 federal budget and will be applicable for trust taxation year ending on or after December 31, 2021.
Trustees should be aware of the new trust reporting rules summarized as follows:
New Filing Requirements
Previously, a trust had to file a T3 tax return if it has tax payable or if it distributes all or part of its income or capital to its beneficiaries during the year. Certain trusts have been exempted from a T3 return filing obligation, including a trust that has no activity during the year or no income tax payable. For example, under the old rules a family trust holding a non-income generating vacation property, or a trust created on an estate freeze that receives no dividends or other income in the year did not have to file an annual T3 return.
Applicable for taxation years ending on or after December 31, 2021, the above exemption will no longer be available. Most trusts will be required to file an annual T3 return, with some exceptions discussed below.
New Annual Information Reporting Requirement
Under the new rules, trusts will have to report the identity of all trustees, beneficiaries and settlors of the trust, along with each person who has the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust (e.g., a protector).
The information required to be disclosed includes:
- Date of birth (for an individual);
- Jurisdiction of residence; and
- Taxpayer identification number (e.g. a social insurance number, a business number, an account number of a trust, and a taxpayer identification number used in other jurisdictions for a non-resident).
Trustees should carefully read the trust documents to identify those stakeholders for whom information is required to be disclosed. Collecting the information required could be onerous for the trustees, as many family trusts were set up to maintain flexibility in future distribution and may include a broad class of beneficiaries.
A trust could also have contingent beneficiaries who are unascertained at the time of filing. The disclosure requirements will be met if the required information for any ascertained beneficiaries is provided with reasonable effort, and for the unascertained beneficiaries sufficiently detailed information is provided to determine whether any particular person would be a beneficiary of the trust. For example, beneficiaries may be referred to as the “issue of Mr. A” in the trust deed, which includes children, grandchildren and future descendants of Mr. A, whether born or unborn. The filing requirement will be met if information for all Mr. A’s current children and grandchildren is provided as well as the details indicating that any future issue of Mr. A will be a beneficiary of the trust.
Exceptions to the New Rules
Certain trusts may continue to be exempt from filing T3 returns and the new additional disclosure requirements, including:
- Graduated rate estates;
- Qualified disability trusts;
- Trusts in existence for less than 3 months; and
- Trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the year, if the assets are comprised of cash, certain government debt obligations, mutual fund units, or publicly-traded securities.
Note that alter ego trust, spousal trust, and joint spousal or common-law partner trusts are not exempt from the new reporting requirements. Estates that do not qualify as a graduated rate estate will be caught by the new reporting rules as well.
Trusts that hold private corporation shares or real estate will be required to file a T3 return, no matter how small the value of the assets is.
Bare trusts used to hold title to property for another beneficial owner appear to be exempted from the new trust reporting requirements as they are treated as a non-entity for income tax purposes.
Penalties for Non-Compliance
The T3 return must be filed no later than 90 days after the trust’s tax year-end.
Penalties for late filing the T3 return, including the new identity information schedule, will be $25 per day, with a minimum penalty of $100 and a maximum penalty of $2,500.
If the failure to file was done knowingly or due to gross negligence, further penalties may also apply. The amount is calculated at 5% of the maximum fair market value of the property held in the trust in the year, with a minimum penalty of $2,500. As an example, for a trust that holds shares in a private company worth $1 million, the penalty would be $50,000. The harsh penalty highlights the importance of staying in compliance with the new reporting requirements.
The new rules will increase the administrative burden on the trustees. To prepare for the new filing and reporting requirements, it is advisable for the trustees to act proactively to understand the impact of the changes in the trust reporting obligations and start to obtain the necessary information required to be disclosed.