On February 27, 2018 (“Budget Day”), the Federal Government tabled the third budget (“Budget 2018”). This year’s budget focuses on continuing to strengthen the middle class and economic growth. The following are some of the notable personal income tax measures proposed in Budget 2018, which relate to qualifying plan holders for Registered Disability Savings Plans, new reporting requirements for certain trusts and favourable changes for charities.
Registered Disability Savings Plan (“RDSP”) – Qualifying Plan Holders
Currently, where the capacity of an adult individual to enter into a contract is in doubt, the Income Tax Act requires that the plan holder of the individual’s RDSP be the individual’s legal representative. Establishing a legal representative can be a lengthy and expensive process that can have significant repercussions for individuals. Where the adult individual does not have a legal representative in place, a temporary federal measure exists to allow a qualifying family member (i.e., a parent, spouse or common-law partner) to be the plan holder of the individual’s RDSP. This measure is legislated to expire at the end of 2018; however, Budget 2018 proposes to extend the temporary measure by five years, to the end of 2023. A qualifying family member who becomes a plan holder before the end of 2023 could remain the plan holder after 2023.
Reporting Requirements and Penalties for Trusts
A trust that does not earn income or make distributions in a year is generally not required to file an annual T3 income tax return. Even if a trust is required to file a return for a year, currently, there is no requirement for the trust to report the identity of all its beneficiaries. Given the absence of an annual reporting requirement and the limitations with respect to the information collected when reporting is required, there are gaps with respect to the information that is currently collected with respect to trusts. To improve the collection of beneficial ownership information with respect to trusts and to assist the CRA in assessing the tax liability for trusts and its beneficiaries, Budget 2018 proposes to impose an obligation on certain trusts to file a T3 income tax return where one does not currently exist and to provide additional information on an annual basis. The new reporting requirements will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 income tax return. The following trusts are exempt from the additional reporting requirements: mutual fund trusts, segregated funds and master trusts; trusts governed by registered plans (i.e., DPSPs, RRSPs, RRIFs, TFSAs, etc.); lawyers’ general trust accounts; gradated rate estates and qualified disability trusts; 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 tax year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities).
Where the new reporting requirements apply, the trust will be required to report 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 appointment of income or capital of the trust (i.e., a protector).
Budget 2018 proposes to provide funding of $79 million over a five-year period and $15 million on an ongoing basis to the CRA in order to support the development of an electronic platform for processing T3 returns.
If you fail to file a T3 return, including a required beneficial ownership schedule, where required, there will be a penalty equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500. If a failure to file was made knowingly, or due to gross negligence, an additional penalty will apply, equal to 5% of the maximum fair market value of property held during the relevant year by the trust, with a minimum penalty of $2,500.
These proposed new reporting requirements will apply to returns required to be filed for the 2021 and subsequent tax years.
Charities – Municipalities as Eligible Donees
The Government of Canada supports registered charities in a number of ways, including through the charitable donation tax credit (for individuals) and deduction (for corporations). Charities are required to follow certain rules in order to maintain its charitable registration status, including that they operate exclusively for charitable purposes, devote all of their resources to charitable activities and file an annual information return six months after their fiscal year-end. The registration of a charity may be revoked at the request of the charity or because the charity has not complied with its registration requirements. In either case, the Income Tax Act imposes a 100% revocation tax on the charity based on the total net value of its assets. In order to ensure that a revoked charity’s accumulated property remains in the charitable sector, a charity can reduce the amount of revocation tax by making qualifying expenditures, including gifts to “eligible donees”. Budget 2018 proposes to amend the Income Tax Act to allow transfers of property to municipalities to be considered qualifying expenditures for the purposes of the revocation tax, subject to the approval of the Minister of National Revenue on a case-by-case basis. In circumstances where an eligible donee cannot be located, this change will allow the property to be transferred to a municipality for the benefit of the community. This measure will apply to transfers made on or after Budget Day.
Charities – Universities Outside Canada
Canadians may claim the charitable donation tax credit or deduction for donations made to registered charities and other “qualified donees”. Since 1996, universities outside Canada have been eligible to be recognized as “qualified donees” if they demonstrate to the CRA that, among other things, their student body ordinarily includes students from Canada. Qualifying universities outside Canada are included in the Income Tax Regulations. Since 2011, as a result of amendments to the Income Tax Act, universities outside Canada have been required to register with the CRA and to meet certain receipting and record-keeping conditions. Once these qualified donees are registered, public notification is provided by listing them on the Government of Canada’s website. To simply the administration of these rules and streamline the registration process for universities outside Canada as qualified donees, Budget 2018 proposes to remove the requirement that universities outside Canada be prescribed in the Income Tax Regulations, effective as of Budget Day.