On July 27, 2018, Finance released draft tax legislative proposals, which included additional information about the new trust reporting requirements that were announced in the 2018 Federal budget (see Bulletin on "2018 Federal Budget: Trust Reporting Requirements and Compliance - A Heavier Burden on Trustees"). The following points from the draft legislation are noteworthy for advisors, trustees, beneficiaries and protectors of Canadian trusts that are caught by these rules:
1. Subsection 150(1) of the Income Tax Act stipulates the tax return requirements and the filing dates for different categories of taxpayers, including trusts. The existing subsection 150(1.1) sets out exceptions to subsection 150(1), that is, when the filing of a tax return is not required. Subsection 150(1.1) is amended to provide that the exceptions from filing a return outlined therein do not apply to an express trust (or for civil law purposes a trust other than a trust that is established by law or by judgment), that is resident in Canada, unless the trust meets one of the exceptions outlined in the new subsections 150(1.2)(a) to (n).
The phrase "express trust" is not defined in the draft legislation, but it is commonly understood to mean a trust that arises from the explicit instructions of the settlor/testator; while, a non-express trust is a trust that is imposed by courts, such as a resulting trust and a constructive trust.
New subsection 150(1.2) provides that a trust that is resident in Canada (including trusts that are deemed resident in Canada under section 94) and that is an express trust (or for civil law purposes a trust other than a trust that is established by law or by judgment) must file an annual T3 income tax return notwithstanding that it may meet one of the exceptions listed in subsection 150(1.1), unless the trust meets one of the exceptions outlined in subsections 150(1.2)(a) to (n).
Trusts that are required to file a T3 income tax return, whether because of current filing requirements under s. 150(1) or because of new subsection 150(1.2), will be required to provide additional information outlined in section 204.2 of the Regulations.
2. The exceptions to the reporting requirements in new subsection 150(1.2) are:
- Trusts that have been in existence for less than three months at the end of the year;
- Trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the year, if the only assets held by the trust throughout the year are one or more of:
- certain government debt obligations;
- a share, debt obligation or right listed on a designated stock exchange;
- a share of the capital stock of a mutual fund corporation;
- an interest in a related segregated fund (within the meaning assigned by subsection 138.1(1)(a);
- A lawyer's general trust account (but not specific client accounts);
- Trusts that qualify as non-profit organizations or registered charities;
- Mutual fund trusts, segregated funds and master trusts;
- Graduated rate estates;
- Qualified disability trusts;
- Employee life and health trusts;
- Certain government funded trusts;
- Trusts under or governed by a deferred profit sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund or registered retirement savings plan; and
- Cemetery care trusts and trusts governed by eligible funeral arrangements.
3. A harsh penalty is imposed on any person or partnership that is subject to the reporting requirements and who fails to file a T3 income tax return for a trust or who knowingly or under circumstances amounting to gross negligence either makes, or participates in, assents to or acquiesces in, the making of, a false statement or omission in the return in an amount equal to the greater of:
- $2,500; and
- 5% of the highest total fair market value of all the property held by the trust in the year.
4. New subsection 204.2(1) sets out the additional information that a trust that is required to file a T3 income tax return must file in the T3 form. The additional information includes the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and taxpayer identification numberfor each person who, in the year,
- is a trustee, beneficiary or settlor of the trust; or
- has the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust (i.e., a protector of the trust).
5. The requirement to provide information in respect of the beneficiaries of a trust is met if:
- the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return; and
- for beneficiaries whose identity is not known or ascertainable with reasonable effort by the person making the return, the person making the return provides sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.
For example, the beneficiary of a trust may not be known where the trust provides for a class of beneficiaries that includes the settlor's current children and grandchildren and any children or grandchildren that the settlor may have in the future. In these circumstances, the reporting requirement will be met if the relevant information in respect of all of the settlor's current children and grandchildren are included as well as the details of the terms of the trust that extend the class of beneficiaries to any of the settlor's future children or grandchildren.
6. The new reporting requirements for trusts will apply for taxation years that end after December 30, 2021.
While trusts are still a useful tool for holding property, these new cumbersome reporting and disclosure requirements of trustees, beneficiaries and protectors will give settlors/testators cause for concern when determining whether to set up a trust.