Currently, the Canadian government only requires a trust to file an annual T3 “Trust Income Tax and Information Return” if: (a) it has income taxes payable; or (b) if it makes at least one distribution during the year. Trusts that have had no activity during the year or have no income tax payable, are generally not required to file a T3 return. The government has determined that a lack of reporting means a lack of information regarding how certain trusts are created, used, and controlled, which exposes the government to risks of tax avoidance, tax evasion, money laundering, terrorist financing and other criminal activity.
To combat these risks, the federal government has introduced new reporting rules for trusts, which are expected to come into force and apply to taxation years ending after December 30, 2021 (meaning that a trust with a December 31 calendar year end will be required to meet these new requirements for its 2021 tax year). The new rules apply to most resident and deemed resident Canadian express trusts (those created with the settlor or testator’s explicit instructions, such as trusts holding private company shares, trusts created as part of an estate freeze, testamentary trusts, and inter vivos trusts), regardless of whether they have income payable or have made any distributions during that taxation year.
A trust to which the new reporting rules apply, must file an annual T3 return and a new schedule disclosing the name, address, date of birth, tax identification number, and jurisdiction of residence of the settlor, of each trustee and each beneficiary (even if he/she was a trustee or beneficiary for only one day in the year) and of each person who is able to exert influence over trustee decisions (i.e. protectors). With respect to beneficiaries, it is sufficient for the person filing the return to disclose the information of all known beneficiaries or ascertain the identity of the beneficiaries with reasonable effort.
Depending on the circumstances, the following types of trusts may be excluded from the new reporting rules:
- Trusts that, at the end of the taxation year, have been in existence for fewer than three months;
- Trusts that hold assets with a total fair market value of $50,000 or less 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 or an interest in a related segregated fund);
- Cemetery care trusts and trusts governed by eligible funeral arrangements;
- Trusts that qualify as non-profit organizations or registered charities;
- Mutual fund trusts, segregated funds, and master trusts;
- Employee life and health trusts;
- Trusts governed by registered plans such as RRSPs and RRIFs;
- Graduated rate estates and qualified disability trusts;
- Certain regulated trusts such as a lawyer’s general trust account;
- Required trusts under relevant laws or rules of professional conduct; and
- Certain government-funded trusts.
If a trust administrator provides incomplete or inaccurate information or fails to file the prescribed form or trust return, it may be subject to existing non-compliance penalties. If a trust administrator knowingly (or under circumstances amounting to gross negligence) fails to file a return, or makes, participates in, assents to, or acquiesces in the making of a false statement or omission, he or she may be subject to a harsher additional penalty. This additional penalty is equal to the greater of $2,500.00 and 5% of the highest total fair market value of all the property held by the trust in that year. For a trust that holds assets of high value, the cost of non-compliance can be significant. A penalty may not apply where reasonable effort is undertaken to file complete and accurate information.
Complying with the new reporting requirements may be onerous. Trustees need to understand their new legal obligations and would be well advised to review trust documents in detail to ensure all relevant parties are identified, engage in early communications with the affected parties and plan ahead to obtain the necessary details, especially where beneficiaries are potentially unknown or may be uncooperative. Trust administrators may also consider unwinding trusts that are no longer needed to minimize ongoing compliance obligations.
In preparation for the upcoming increase in T3 returns, the CRA is revamping its filing and processing system over the next few years. Online registration for trust account numbers in CRA’s My Business Account service will be rolled out sometime in 2021, electronic filing for certain types of T3 returns is anticipated to be introduced in 2022, and electronic filing for all other types of T3 returns is expected to be available in 2023.