The federal government proposed new trust reporting rules in the 2018 Federal Budget to improve the collection of beneficial ownership information with respect to trusts. The new trust reporting rules will apply to tax years ending on and after December 31, 2021. These changes to the reporting requirements are considerable for trust returns with the penalties for non-compliance being significant.
The Current Rules
Currently, a trust needs to file a T3 trust tax return if the trust has taxable income (an active trust) or if part or all of its capital is allocated to beneficiaries at any point during the year. If the trust has no taxable income in the year, a T3 trust tax return is not required to be filed.
The Changes
For trust taxation years ending on or after December 31, 2021, Canadian of both active and inactive trusts, with certain exceptions, will now be expected to file a T3 return and report additional information.
Exceptions from the New Requirements
Some inactive trusts will be exempt from filing. A trust that holds assets below $50,000 throughout the year will not be expected to file a T3 return as long as the only assets held by the trust are limited to one or more of the following:
- Cash
- Government debt obligations
- A share, debt obligation or right listed on a designated stock exchange
- A mutual fund share or trust unit
- An interest in a segregated fund
Additionally, some specific types of trusts are exempt from this filing requirement including:
- A trust that is a registered charity
- A graduated rate estate
- A qualified disability trust, and
- A trust that has been in existence for less than three months.
Why the changes?
These changes are part of a push for increased disclosure and transparency for trusts. This new legislation aims to help the Canada Revenue Agency (CRA) collect beneficial ownership information and assess the tax liability for trusts and their beneficiaries.
The New Reporting Requirements
Trusts that are subject to the new reporting requirements will be required to report information for most parties involved with the trust. Each trust will have to report the following for each person who is a trustee, beneficiary, settlor, or protector:
- Name
- Address
- Date of Birth
- Jurisdiction of Residence
- Taxpayer identification number (i.e., social insurance number, business number, trust account number, foreign taxpayer identification number).
What happens if you don’t comply?
If the new required information is not filed, the penalty will be $25 per day of delinquency, starting with a minimum penalty of $100 to a maximum of $2,500 per year. Additionally, if it is deemed that the failure to file was made knowingly or because of gross negligence, there will be an additional penalty equal to the greater of $2,500 and 5% of the fair market value of all the property held by the trust.
Recommendation
The new reporting obligations can be onerous for certain trusts. The trustees are responsible to ensure the reporting requirements are met. They should invest the time to understand the new requirements and plan ahead so compliance obligations can be met. The following are some items for consideration in preparation for the new reporting requirements:
- Ensure all trustees are advised of these new reporting requirements as soon as possible;
- Consider formally winding up dormant trusts or trusts that no longer serve a purpose prior to January 1, 2021;
- Consider beneficiary, trustee and protector changes prior to 2021 but remember, these changes could have significant income tax implications;
- Locate trust documents so you can identify each person that must be reported (e.g., settlors, trustees, beneficiaries and protectors). Additional care should be given in situations where the trust has one or more class of beneficiaries (e.g., corporate beneficiaries).
To help in gathering the information to meet the new standards, we have created a form for you to complete. (Please Click Here To Downloaad). We may be contacting you, if we haven’t already, to gather the information to meet the new reporting requirements. If you have any questions regarding these new reporting rules, please reach out to us.
