As written previously, the requirement to file a tax return for trusts has been expanded. Thanks to new legislation, there are now exceptions to the exception to file.
Generally speaking, a trust (other than a trust established by law or judgment) that is resident in Canada must file a tax return, unless the trust had been in existence for less than three months at the end of the year or holds assets with a total fair market value that does not exceed $50,000 throughout the year and the only assets held by the trust throughout the year are one or more of cash, a share, debt obligation or right listed on a designated stock exchange, a share of the capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund. This is not a comprehensive list.
A joint submission of comments and recommendations by the Associations for lawyers and accountants has been made to the Department.
Regarding the $50,000 limit noted above, it was recommended that the limit should be based on the total cost of the trust’s assets, rather than fair market value which fluctuates and would add unpredictability to compliance.
It was also recommended that the exception for short-term trusts should be extended from three months to at least six months. It was also recommended that the Department of Finance consider adding an exception with no time limit that would be for a trust the principal purpose of which is for securing potential contractual claims in the case of a purchase or sale of a business.
With respect to estates, the joint submission pointed out that there is no exception for small estates with no income or gains that would not otherwise be required to file a return.
Another issue identified by the joint submission is the case of a family trust that holds personal-use property. A common example of this is a cottage held in-trust for family members. Obviously, such trusts would not meet the $50,000 exemption and, as the rules are now worded, would be required to file a tax return every year. Moreover, it is believed that the non-commercial nature of these trusts increases the likelihood that they would be unaware of their compliance obligations and therefore be subject to penalties.