New Trust Reporting Requirements
The use of a trust can be an effective tool in a variety of estate planning and asset protection arrangements.
Proposed legislation, that once enacted, will significantly expand the reporting requirements for certain trusts for taxation years ending on or after December 31, 2021.
JANUARY 2022 STATUS UPDATE:
The legislation to support this proposed measure is pending. The CRA will administer the new reporting and filing requirements once there is supporting legislation that receives Royal Assent. The CRA will continue to administer the existing rules for trusts, under enacted legislation. The proposed beneficial ownership reporting requirements will not be part of the published 2021 T3 Income Tax Return.
It is not recommended that you delay the filing of your 2021 T3 Tax Return.
Purpose of Proposed Legislation
The CRA is seeking expanded disclosure requirements to obtain transparency regarding beneficial ownership as well as to ensure that tax liabilities for the trusts and their respective beneficiaries are properly assessed.
Although the legislation was initially released on July 27, 2018, it still remains proposed. The Federal government, however, has confirmed in the 2019 budget that they intend to proceed with the announced measures.
Breakdown of Changes
T3 Filing Requirements
Currently, a personal trust is not required to file an annual return where certain exceptions are met. Under this proposed legislation, a significant number of personal trusts resident in Canada will no longer meet these exemption criteria and will now be required to file an annual return even where there is no income tax liability and the trust made no distributions or allocations during the year.
- A trust has been in existence for less than three months at the end of the year;
- A trust that holds less than $50,000 in assets throughout the taxation year (provided that their holdings are confined to cash, certain debt obligations, and listed securities);
- Regulated trusts such as lawyers’ general trust accounts;
- Trusts that qualify as not-for-profit organizations or registered charities;
- Mutual fund trusts, segregated fund trusts and master trusts;
- Qualified disability trusts;
- Employee life and health trusts;
- Certain government funded trusts;
- Graduated rate estates;
- Registered savings plans (i.e. RRSP, RESP, TFSA etc.); and
- Cemetery care trusts or a trust governed by an eligible funeral arrangement.
Important Note: Trusts created to hold personal-use assets for estate planning or asset protection purposes that previously qualified for a filing exemption will now be subject to these new filing requirements.
Additional Information Requirements
Under the proposed regulations, certain types of trusts that are required to file a T3 return must disclose personal information for each trustee, beneficiary, settlor, and any person who has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust. The information that must be disclosed includes the following:
- Date of birth;
- Jurisdiction of residence; and
- Taxpayer identification number (TIN) (i.e. social insurance number, business number, trust account number, or foreign TIN).
Important Note: A ‘settlor’ defined in this new disclosure extends beyond the person who established the trust. It will likely include non-arm’s length persons who participated in an estate freeze in favour of a trust, sold property or loaned money or property to the trust, or paid expenses on behalf of the trust.
The proposed legislation also introduces an additional penalty that can be imposed. If a false statement, omission or failure to file a return was made by any person knowingly or under circumstances amounting to gross negligence, that person could face a penalty equal to the greater of $2,500 and 5% of the highest fair market value of the assets of the trust during the year.