Introduction – Expanded Tax Reporting Rules for Express Trusts
Draft legislation on tax reporting rules for trusts was initially proposed in July of 2018 and later confirmed in the Federal Government's 2019 Budget. The new trust tax reporting rules come into effect for taxation years ending on or after December 31, 2021. These new tax reporting requirements broadly apply to all express trusts resident in Canada as well as non-resident trusts that are required to file annual T3 tax returns. Express trusts are trusts that arise from explicit instructions from the settlor, including testamentary trusts, bare trusts, discretionary trusts, living trusts, and fixed trusts. On the other hand, non-express trusts are ones that are imposed by courts, e.g. resulting trusts and constructive trusts, that are not caught under the new rules. That said, some express trusts remain unaffected by these new rules – specifically:
- Mutual fund trusts, segregated funds, and master trusts;
- Trusts governed by registered plans;
- Lawyers' general trust accounts
- Qualified disability trusts and graduated rate estates;
- Trusts that qualify as non-profit organizations or registered charities;
- Trusts that have been in existence for less than three months or hold less than $50,000 in assets throughout the taxation year (only applies where their holdings are confined to cash, government debt obligations, and listed securities); and
- Cemetery care trusts or a trust governed by an eligible funeral arrangement.
Impact of the New Trust Reporting Requirements
Trusts that were originally exempt from trust filing exceptions, such as trusts created to hold personal-use assets for estate planning, will no longer qualify under the new rules and will be required to file annual T3s. Additionally, all trusts that are required to file annual T3 returns will be required to provide additional information, including the name, address, date of birth, jurisdiction of residence and taxpayer identification number (i.e. business number, social security number, trust account number, or foreign tax identification number) for each person involved in the trust. Specifically, this means that:
- Settlors; and
- Every other person who has the ability, through the terms of the trust or a related agreement, to exert influence over trustee decisions regarding the distribution of income or capital
must provide the above information. Regarding the 4th point, this is referring to a special individual generally referred to as a protector of a trust. A protector is typically a trusted individual who is granted the power to veto trustee decisions or dismiss/appoint new trustees in order to better ensure that the trust is being used as the settlor intended. Furthermore, for the purposes of the new rules, a settlor is not only the person who established the trust, but may also extend to non-arm's length persons who sold property to the trust, loaned money/property to the trust, or paid expenses on behalf of the trust. Our top Toronto tax firm can advise you about the new tax reporting obligations being put on trusts and whether or not they apply to your specific situation.
New Penalties for Non-Compliance
Along with the new reporting requirements, new tax non-compliance penalties have been established. Where a trust fails to file the required T3 tax return by the due date, or where a trust files the T3 return without the newly required information, it will face penalties of $25 per day that they are not filed, up to a maximum of $2,500 (and a minimum penalty of $100). Where a false statement, omission, or failure to file the required T3 return (and information slips) is done knowingly or under circumstances that amount to gross negligence, an additional penalty will apply. The additional penalty equals $2,500 or 5% of the maximum fair market value of the property held by the trust during the relevant year, whichever is the higher amount. This means that trusts holding assets of $50,000 or less will face an additional $2,500 penalty, while trusts holding assets of more than $50,000 will be penalized 5% of its asset value (for example, a trust with a value of $1,000,000 would be penalized an additional $50,000). Notably, the additional penalty does not require that the error or omission be one of great magnitude – any error or omission can result in the additional penalties, if they are done knowingly or under circumstances that amount to gross negligence.
Pro-Tax Tip – Get Ready for the New Trust Tax Reporting Requirements Before the Deadline
Given that the new trust tax reporting rules significantly expand what is required to be filed by trusts and require information that trustees may not currently have on hand, it is important that trustees ensure that they have all of the necessary information sooner rather than later. This is especially key given the significant penalties that can apply. Speak to one of our experienced Toronto tax lawyers and determine whether any exemptions apply to your trust and learn more about how to meet the new requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.