The federal government proposed new tax reporting rules for trusts in the 2018 budget, which have now come into effect for the 2021 and subsequent taxation years. These rules impact the required income tax filings of trusts for taxation years ending on or after December 31, 2021. Failure to comply with the new requirements could result in penalties to the trustee.
Reporting Requirements: Old and New
Prior to these changes, a trust was only required to file an annual income tax (T3) return for a given year if it had tax payable or if it distributed all or part of its income or capital to its beneficiaries.
For 2021 and all subsequent taxation years, all non-resident trusts required to file a T3 return and certain express trusts (generally a trust created with the settlor's express intent, usually made in writing) that are resident in Canada must provide additional information on an annual basis. As a result, certain trusts will have to file a T3 return where they otherwise did not. This change has been made to improve the collection of beneficial ownership information with respect to trusts and to help the CRA assess the tax liability for trusts and their beneficiaries.
For taxation years ending on or after December 31, 2021, the new reporting rules require the affected trusts to report the identity (i.e. the name, address, date of birth (in the case of an individual), jurisdiction of residence, and taxpayer identification number), of all:
- beneficiaries; and
- persons who have the ability, through the trust terms or a related agreement, to exert influence or override trustee decisions regarding the appointment of income or capital of the trust (ex: a protector) in the year.
If the trust has no income to report, the trust must still file a T3 return in order to file the new schedule which reports the trust disclosure information.
How to Provide the Additional Information
A trust will file a new schedule with its T3 return to report the additional information regarding its beneficial owners. Further information about the new schedule will be posted on Canada.ca when it is available for the 2021 taxation year.
Exceptions to the New Reporting Requirements
The following types of trusts (that are either resident in Canada or non-resident but required to file a T3 return) are not required to provide additional information:
- mutual fund trusts, segregated funds and master trusts;
- trusts governed by registered plans (i.e. deferred profit-sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax-free savings accounts);
- lawyers' general trust accounts;
- graduated rate estates and qualified disability trusts;
- trusts that qualify as non-profit organizations or registered charities;
- trusts that have been in existence for less than three months; and
- trusts that hold less than $50,000 in assets throughout the taxation year (provided that their holdings are confined to deposits, government debt obligations and listed securities).
Penalties for Failure to Report
If a trust that is required to file a T3 return fails to do so or fails to provide the additional information about the beneficial ownership, a penalty equal to $25 for each day of delinquency will apply. The minimum penalty is $100, and the maximum penalty is $2,500.
If a failure to file the return was made knowingly, or due to gross negligence, an additional penalty applies. The additional penalty is equal to 5% of the maximum value of property held during the relevant year by the trust, with a minimum penalty of $2,500. Further, late-filing and non-filing penalties with respect to the T3 return continue to apply, which can include a fine of $1,000 to $25,000 or a fine and imprisonment for a period of up to 12 months.
In practice, these new trust reporting requirements create more work for trustees in terms of gathering and reporting the required additional information along with a T3 return. Additionally, these penalties can cause significant issues with unsophisticated executors, as these executors may not be aware of the reporting requirements and could run the risk of incurring large penalties.
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.