The Canada Revenue Agency (CRA) has implemented several new trust reporting rules that will apply to taxation year-ends starting December 31, 2021.
The CRA has significantly expanded its reporting and disclosure requirements for trusts, continuing a previous trend of greater disclosure of beneficial ownership of trusts. The new requirements also bring the potential for large penalties for non-compliance by trustees or other persons assisting with the preparation of T3 trust income tax returns.
New Requirement to File Return
Subsection 150(1.2) of the Income Tax Act, RSC 1985, c 1 (5th Supp) (ITA), requires an “express trust” that is resident in Canada to file a T3 trust income tax return. This rule will apply to trusts that are factually resident in Canada and trusts deemed to be resident in Canada. The exceptions to the filing requirement found in subsection 150(1.1) of the ITA will no longer apply. Instead, a set of new narrow exceptions apply for trusts such as:
- Mutual fund trusts;
- Trusts governed by certain registered plans (i.e. RRSPs);
- Lawyers' general trust accounts;
- Graduated rate estates and qualified disability trusts;
- Non-profit organizations or registered charities;
- Trusts that have been existence for less than 3 months; and
- Trusts that hold less than $50,000 in assets throughout the taxation year, provided their holdings are confined to certain assets such as cash, government debt obligations, and listed securities.
New Disclosure Required in Return
Under Regulation 204.2 of the Income Tax Regulations, CRC, c 945, each person who is a trustee, beneficiary, settlor, or person who has the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust must disclose their name, address, date of birth, jurisdiction of residence and tax identification number .
There are a couple of issues with this new requirement, particularly about who qualifies as a beneficiary, settlor and person with the ability to exert influence over trustee decisions. First, the term “beneficiary” is not a defined term in the ITA. It is unclear if a beneficiary should include persons that are “beneficially interested” pursuant to subsection 248(25) of the ITA. If so, this would result in a very broad definition. Second, the definition of settlor in subsection 17(15) of the ITA is very broad. It includes any person that has previously made a loan or transfer of property, directly or indirectly in any manner whatever, to or for the benefit of a trust. There is a narrow exception for a person that dealt at arm's length with the trust, and will only apply if the loan was at a reasonable rate of interest and the transfer occurred at fair market value. Third, the scope of persons who can exert influence over trustee decisions is unclear. For example, if the trustee is a corporate trustee, does “persons who exert influence” include directors and shareholders of the corporation?
New Penalty for Non-Compliance
Under subsections 163(5) and (6) of the ITA, a penalty will apply to persons who participate in, or acquiesce to, the making of a false statement or omission. This means that the penalty could apply to a trustee or any other person involved in preparing a T3 trust income tax return, broadening the scope of liability. Acts that will trigger the new penalty include errors, omissions or failures to file made with knowledge or gross negligence. The penalty will be the greater of $2,500 and 5% of the fair market value of the trust's property. However, the penalty is not applicable to the excepted trusts as previously listed.
With the introduction of the new rules, it will be important for trusts to start early in gathering the required information for its year end T3 trust income tax return. For example, settlors, beneficiaries and trustees may be uncomfortable or uncooperative in providing such personal information as their social insurance numbers.
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