The 2018 Federal Budget introduced rules that will require trusts to report additional information to the Canada Revenue Agency (CRA) annually to improve the collection of beneficial ownership information. The new rules will also require annual tax returns for trusts, where they were formerly not needed.
The current rules
Currently, a trust that does not earn income or make distributions in a year generally is not required to file an annual T3 return of income. A trust is required to file a T3 return if it has tax payable, if it disposes of capital property, or if it distributes all or part of its income or capital to its beneficiaries. Even if a trust is required to file a return of income for a year, there is currently no requirement to report the identities of beneficiaries.
The new rules
The new reporting requirements will apply to express trusts (trusts created with the settlor's express intent, usually written) that are resident in Canada, and to non-resident trusts deemed resident in Canada that are currently required to file a T3 return. The process to determine whether a non-resident trust is deemed resident of Canada is complex, and now with the new penalties noted below, an improper determination could prove costly.
Trusts now subject to the additional reporting requirements include inter vivos, testamentary and living trusts. Certain trusts are exempt, including mutual fund trusts, trusts governed by registered plans, lawyers’ general trust accounts, graduated rate estates, trusts that qualify as non-profit organizations or registered charities, and trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year.
If the new reporting requirements apply, the trust will be required to file a T3 return and include a new schedule that reports the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding the distribution of income or capital. The required identification information will include name, address, date of birth, jurisdiction of residence, and taxpayer identification number.
Penalties
The proposal also includes new penalties for failure to file a T3 return, including the beneficial ownership schedule where required. A fine of $25 will apply for each day late, with a minimum of $100 and a maximum of $2,500. An additional fine of 5 per cent of the maximum fair market value of property held during the taxation year will apply, with a minimum of $2,500 if the failure to file was made knowingly or due to gross negligence. Existing penalties will also continue to apply.
Effective date
These proposed new reporting requirements and penalties will apply to returns filed for tax years ending after December 30, 2021.
Planning
Although this is not an immediate change, trustees should begin gathering the relevant information now to ensure it is available when the reporting is required. Acting promptly will help to provide time to have the information reviewed before submitting it to the CRA.
Several other steps and factors are relevant to these new rules:
- Trustees should ensure that the residence of a trust is consistent with the residence of the controlling persons of the trust (province and country).
- If a trust owns shares in a Canadian-controlled private corporation, the association rules must be considered. The rules can limit access to taxing corporate income at the lowest corporate tax rate.
- Trusts generally are considered to have disposed of their assets every 21 years unless steps are taken to plan around this result. Consequently, income tax may be payable when winding-up a trust, when it might otherwise have been tax-deferred.
- Trustees should consider the attribution rules. They may deem income to be received by individuals even though it is not paid to them.
Contact your Baker Tilly advisor for help in reviewing your trust deeds and to discuss the new reporting requirements.