Today’s blog was written by Pritika Deepak, Associate at Fasken LLP.
Several tax practitioners and professionals alike breathed a sigh of relief on November 3rd, 2022, when Parliament confirmed that the enhanced tax reporting obligations for trusts shall be postponed once more.
As per draft legislation published on August 9, 2022, the application of such enhanced rules was expected to apply to taxation years ending after December 30, 2022. Fortunately, this has been postponed to December 30th, 2023. This means that, unless exempted as discussed below, existing trusts with a December 31st taxation year end will now be subject to the new reporting requirements for 2023.
The following is a brief summary of the most recent draft legislation with respect to additional reporting requirements for trusts.
Under the current rules, a trust is generally required to file an annual income tax return (also known as a ‘T3 Return’) if the trust has taxes payable for the year, or the trust distributes or allocates all or part of its income or capital to its beneficiaries. An inactive trust or a trust with no income tax payable for the year is ordinarily not required to file a T3 Return.
Proposed Legislation – Applicable to taxation years ending after December 30th, 2023
The proposed legislation includes 3 significant changes that are likely to impact clients’ trust reporting:
1. “Express” trusts (elaborated on below) that are resident or deemed resident in Canada will have to file a T3 Return even if the trust does not have any income to report in a particular year.
2. The reporting requirements capture bare trust arrangements.
3. Trusts that are required to a file T3 Return must report the (i) name; (ii) address; (iii) date of birth (for individuals); (iv) jurisdiction of residence; and (v) tax identification number (TIN) for certain persons (discussed below) in a given year.
The proposed legislation drastically limits the broad exceptions which currently allow certain trusts to bypass filing a T3 Return. Specifically, proposed legislation states that any express trust which is resident or deemed resident in Canada will be required to file a T3 Return, even if the trust does not have any income to report in a particular year. Although the term “express trust” is not defined in the Income Tax Act (Canada) (“ITA”), case law and CRA commentary have confirmed that an express trust is generally any trust that is created with the settlor’s express intent.1 As such, many trusts which have benefited from the exemptions that are currently available may have to reassess whether they are required to file a T3 Return under the new rules.
However, the proposed legislation does identify a number of trusts that will continue to be exempt from this requirement to file a T3 Return, including:
• Trusts that have been in existence for less than 3 months at the end of the year.
• Trusts that hold less than $50,000 in assets throughout the taxation year (where the only assets held by the trust throughout the year are cash, certain debt obligations and/or listed securities).
• Certain regulated trusts (such as lawyer’s general trust accounts).
• Trusts that qualify as not-for-profit organizations or registered charities.
• Graduated rate estates.
*Note: A complete list of trusts that will continue to be exempt from the requirement to file a T3 Return can be found here.
Another significant change is one that will impact clients who engage in “nominee planning”. The new reporting rules explicitly apply to ‘bare trust’ arrangements. In other words, trust structures where a nominee (such as a corporation) holds real estate and/or investment accounts in trust for the beneficial owner(s), will be subject to the heightened disclosure and reporting obligations.
It is important to note that trusts that are required to file a T3 Return will be subject to additional disclosure for taxation years ending after December 30th, 2023. Particularly, all such trusts or trust arrangements must report the (i) name; (ii) address; (iii) date of birth (for individuals); (iv) jurisdiction of residence; and (v) tax identification number (TIN) for the following persons in the year:
• the settlor;
• each of the trustees;
• any person who has the ability (through the terms or the trust or related agreement) to exert influence over trustee decisions regarding the appointment of income or capital; and
• each of the beneficiaries.
A trust will generally be considered to have met the additional reporting requirements if the information listed above is disclosed for each beneficiary whose identity is known or ascertainable with reasonable effort at the time of filing the T3 Return.
The proposed legislation also states that a false statement or omission on a T3 Return, made either knowingly or due to gross negligence, will result in a penalty that is equal to the greater of: (i) $2,500; and (ii) 5% of the highest amount at any time in the year of the total fair market value of the property held by the trust.
Although there remains some uncertainty regarding the timing and form of the enhanced reporting obligations, it is now more important than ever for trustees and fiduciaries of a trust to maintain proper documentation related to the trust and to ensure ongoing compliance with the ITA.
1.Government Publications – CRA Q&A Releases – Reporting Requirements for Trusts, January 14, 2022