January 23, 2024 by Riccardo Zerbino

Filing changes for inactive trusts

Until recently, trusts had to file a tax return within 90 days of the trust’s year end, but there were some exceptions. If you didn’t earn income, dispose of capital property or make distributions of income or capital in a year, you were generally not required to file an annual return. However, if you disposed of a property and there was a capital gain, you did have to file. In short, some transaction(s) needed to take place requiring tax to be paid for a filing to be required, if your trust was otherwise inactive. Since filing is quite cumbersome, especially given the trust rules and complications involving beneficiaries, it’s always wise to keep track of policy changes in this area ⁠–⁠ and a significant one arrived recently. Under the revised rules, a trust may now need to file, even if it is inactive. Some of the exceptions inactive trusts have taken advantage of in the past still apply, but others do not.

The most common error

Among clients with trusts, the most common error we encounter is a failure to file. This was a problem under the old rules, and it will continue to be a problem under the new ones. Rather than simply overlook their filing obligations, many clients mistakenly believe they don’t have to file. More often than not, they make this error because they forget capital gains and many other transactions result in tax payable and an obligation to file. Now that even some trusts with no income may need to file, this problem is likely to be amplified.

Graduated rate estates

Another error we often encounter with estate clients is the mistaken assumption they have a graduated rate estate (GRE). A GRE arises as a consequence of someone’s death, and this leads to a favorable tax treatment, but to qualify, you need to first meet a number of conditions. To qualify, you must state your graduated rate estate status at the time of death, not some time in the future ⁠–⁠ and that’s not the only rule or regulation around this type of trust. Unlike other trusts, which all have a year end of Dec. 31, a GRE can have whatever year end the client selects. Since many clients mistake their trust for a graduated rate estate, they often develop a false sense of their year end and their filing obligations.

The challenge of trusts

As someone serving clients with trusts, there are many challenges I encounter on a regular basis. For one, just knowing a trust exists is a challenging aspect of an advisor’s role, as a trust could have been created 15 years ago in favour of a child who was quite young or not even born yet. In the case of an inactive trust, since they’re not currently active, they’re not always brought to an advisor’s attention. With that in mind, it’s a good idea for advisors to review client wills and have conversations about their full financial picture, to ensure no filing requirements are overlooked. With the new reporting requirements, you are also required to report beneficial ownership information on all trustees, settlors, controlling persons for the trust and beneficiaries, which can be challenging because these people don’t always know they are beneficiaries.

Exempt trusts

In the area of trust reporting, it should be noted some trusts are still exempt from the new reporting requirements. The CRA recently amended the new reporting rules, clarifying that registered charities administering internal trusts will not be required to file a T3 Return. In addition, there are similar exemptions that apply to registered plans and qualified disability trusts. Of course, if you have any questions about this issue or any other aspect of inactive trusts, please be sure to contact your Baker Tilly Canada advisor.

Meet the Author

Riccardo Zerbino Riccardo Zerbino
Montréal, Québec
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