As part of the 2018 Federal Budget, the federal government released proposed new trust reporting requirements intended to improve the gathering of beneficial ownership information about trusts and other entities. To successfully combat aggressive tax avoidance, tax fraud, money laundering, and other illegal actions involving trusts that were previously prohibited by law, the guidelines were enacted. For tax years ending on or after December 31, 2021, the new trust reporting regulations will be in effect.
Overview of the current rule
As of now, the CRA’s administrative position is that a trust is required to submit a T3 return if income from trust property is liable to tax, or if, during the tax year, the trust does one of the following:
- Is requested to file;
- Is resident in Canada and has either disposed of, or is deemed to have disposed of, a capital property or has a taxable capital gain (for example, a principal residence, or shares);
- Is a non-resident throughout the year and has disposed of taxable Canadian property;
- Is a deemed resident trust;
- Holds property that is subject to the reversionary trust rule in the Income Tax Act;
- Has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary’s use;
- Receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:
- total income from all sources of more than $500
- income of more than $100 allocated to any single beneficiary
- made a distribution of capital to one or more beneficiaries
- allocated any portion of the income to a non-resident beneficiary
New filing requirements and exemptions
Budget 2018 proposes that all Canadian resident trusts and considered non-resident trusts must submit a T3 return and give the additional information on an annual basis, with some exceptions, for taxation years ending on or after December 31, 2021. Certain trusts that are currently exempt from filing a T3 return will be obliged to do so in 2021 and following years as a result of this new filing requirement.
The following categories of trusts are not needed to give additional information under the new reporting regulations, according to Budget 2018:
- A trust that has been in existence for less than three months;
- A trust that only holds the following assets with a total fair market value that does not exceed $50,000 throughout the year:
- cash;
- government debt obligations;
- a share, debt, or right listed on a designated stock exchange;
- a share of a mutual fund corporation;
- a unit of a mutual fund trust; or
- an interest in a related segregated fund;
- A graduated rate estate;
- A qualified disability trust;
- A trust that qualifies as a non-profit organization or a registered charity;
- A trust that falls into any of the following categories:
- lawyers’ general trust accounts;
- mutual fund trusts, segregated funds, and master trusts;
- trusts governed by registered plans;
- employee life and health trusts.
- government-funded trusts; or
- cemetery care trusts and trusts governed by eligible funeral arrangements.
Reporting Requirements Enhancements
If a trust is not exempted from the above list, it must provide the following information about its trustees, beneficiaries, settlor, and anyone who has the ability (through the terms of the trust or a related agreement) to exert control or override trustee decisions regarding the trust’s income or capital allocation (for example, a protector):
- Name;
- Address;
- Date of birth
- Jurisdiction of residence
- Taxpayer identification number (e.g., SIN, business number, trust account number, or a taxpayer identification number used in a foreign jurisdiction)
All potential beneficiaries, including contingent beneficiaries of a trust, must be disclosed under the new reporting rules. Persons who may be beneficiaries if a specific event occurs are known as contingent beneficiaries. For example, a taxpayer may identify his spouse as the beneficiary of his estate, with a clause in the will naming the taxpayer’s daughter as the beneficiary if the husband dies. Even though the daughter might not benefit from anything if the spouse is still alive, she would have to be reported as a beneficiary in this scenario.
To report the additional information about its beneficial owners, a trust must file a revised schedule with its T3 return. Even if the trust does not have any income to declare, it must submit a T3 return to report the additional information. The T3 return and the revised timetable must be filed separately.
Updated penalties
Budget 2018 includes new penalties for failing to file a T3 return. The current penalty is $25 per day, with a $100 minimum and a maximum penalty of $2,500.
An additional penalty will now be applied if a failure to file the T3 return was made knowingly or due to gross negligence, equal to 5% of the maximum fair market value of property held during the year by the trust, with a minimum penalty of $2,500.
Because the additional reporting requirements will be implemented on December 31, 2021, trustees may want to take steps now to guarantee a seamless transition and minimize the impact of the new standards. A thorough analysis of the trust documents should be conducted to identify all parties who may be affected by the new reporting requirements. It is preferable to begin communicating with the appropriate parties about the new reporting standards and the required information earlier in the process rather than later.
In the event you have any queries or require additional information, please do not hesitate to contact IDM Professional Corporation CPA.
