As most trust and tax practitioners know, The Income Tax Act (“ITA”) will attribute trust income, losses, capital gains and capital losses to the contributor / settlor if certain conditions are met.
The 2016 T3 Guide states the following: Certain related amounts, including taxable capital gains and allowable capital losses from that property or the substituted property, are considered to belong to the contributor during the contributor’s life or existence while a resident of Canada. The trust must still report the amount on the trust’s T3 return and issue a T3 slip reporting the amount as that of the contributor of the property.
While the recommended approach to report the amount of the attributed income is certainly a good practical approach, it may not be consistent with the law. The ITA will only provide a deduction against trust income for amounts paid or payable to the beneficiaries which requires the issuance of a corresponding T3 slip to the recipient beneficiaries. In many cases, however, the terms of the trust that is affected by the circumstances described above will not have any amounts paid or payable to the contributor / settlor and ultimately the taxation of the applicable amounts in the contributor / settlor’s hands.Accordingly, when preparing the accounting records for the trust, the attributed amounts are not recorded as being paid or payable to the contributor /settlor.
As a result, many practitioners do not agree that a T3 slip should be issued to the settlor and, instead, the attributed amounts should simply be recorded as an elimination of the applicable reported amounts on the T3 return and a subsequent direct reporting by the contributor / settlor.
When asked to comment on this, the Canada Revenue Agency (“CRA”) noted that a T3 Trust Income Tax and Information Return is both a return of income and a general information return. A T3 trust return serves to report not only information about the reporting trust, but also additional information, such as that affecting the taxation of persons (for example, beneficiaries or settlors) having some connection to the trust. Consistent with this is the additional requirement for the trust to issue a T3 slip to persons whose own income tax requirements may be affected by arrangements involving the trust. These persons include those to whom an amount is attributed from the trust under one of the statutory attribution rules.
The CRA notes that the information provided under these reporting mechanisms is necessary for the proper administration of the tax system and further notes that these specific reporting requirements are imposed various sections of the Income Tax Regulations.
Therefore, given the nature of the T3 return as both a return of income and an information return, the statutory requirement to file a T3 return exists where the trustee has control of or receives income, gains or profits in the trustee’s fiduciary capacity, even if the trustee computes nil income for the trust for tax purposes.