On November 3rd, 2022, the Fall Economic Statement 2022, tabled in Parliament, confirmed that the enhanced tax reporting obligations for trusts shall apply to taxation years ending after December 30th, 2023. This means that, unless exempted as discussed below, existing trusts with a December 31st taxation year end will now be subject to the new reporting requirements for 2023.
The federal government initially announced measures to require additional reporting and disclosure from trusts on an annual basis in its 2018 federal budget. The primary purpose of these amendments was to increase transparency of trusts, their beneficial ownership and legal control. The following is a summary of the most recent draft legislation with respect to additional reporting requirements for trusts.
Subsection 150(1) of the Income Tax Act (the “ITA”) outlines the requirements for filing tax returns for various categories of taxpayers, including trusts. Subsection 150(1.1) of the ITA provides exceptions to the application of subsection 150(1), whereby the filing of a tax return is not required. Under the current rules, a trust is generally required to file an annual income tax return (commonly referred to as a ‘T3 Return’) if the trust has taxes payable for the year, or the trust distributes or allocates all or part of its income or capital to its beneficiaries. An inactive trust or a trust with no income tax payable for the year is generally not required to file a T3 Return.
Proposed Legislation – Applicable to Taxation Years Ending After December 30th, 2023
This bulletin will discuss three salient changes that are likely to impact clients’ trust reporting:
- First, “express” trusts (elaborated on below) that are resident or deemed resident in Canada will have to file a T3 Return even if the trust does not have any income to report in a particular year.
- Second, the reporting requirements capture bare trust arrangements.
- Lastly, trusts that are required to a file T3 Return must report the (i) name; (ii) address; (iii) date of birth (for individuals); (iv) jurisdiction of residence; and (v) tax identification number (TIN) for certain persons (hereinafter discussed) in a given year.
The proposed legislation drastically limits the broad exceptions which are currently provided for under subsection 150(1.1) of the ITA. Specifically, proposed subsection 150(1.2) states that subsection 150(1.1) of the ITA shall not apply to any express trust which is resident or deemed resident in Canada. Although the term “express trust” is not explicitly defined in the ITA, case law and CRA commentary have confirmed that an express trust is generally any trust that is created with the settlor’s express intent. As such, any express trust that is resident or deemed resident in Canada will be required to file a T3 Return, even if the trust does not have any income to report in a particular year.
Proposed subsection 150(1.2) does, however, identify a number of trusts that will continue to be exempt from this requirement to file a T3 Return, including:
- Trusts that have been in existence for less than 3 months at the end of the year;
- Trusts that hold less than $50,000 in assets throughout the taxation year (where the only assets held by the trust throughout the year are one or more of: cash, certain debt obligations or rights listed on a designated stock exchange, shares of the capital stock of a mutual fund corporation, units of a mutual fund trust, interests in a related segregated fund trust, and interests as a beneficiary under a trust, all the units of which are listed on a designated stock exchange);
- Certain regulated trusts (such as lawyer’s general trust accounts);
- Trusts that qualify as not-for-profit organizations or registered charities;
- Mutual fund trusts, segregated funds trusts and master trusts;
- Trusts all the units of which are listed on a designated stock exchange;
- Graduated rate estates;
- Qualified disability trusts;
- Employee life and health trusts;
- Certain government funded trusts;
- Trusts governed by registered plans such as:
- Cemetery care trusts or trusts or trusts governed by an eligible funeral arrangement.
Another significant change is one that will impact clients who engage in “nominee planning”. Subsection 150(1.3) of the proposed legislation explicitly provides that the new reporting rules apply to ‘bare trust’ arrangements. In other words, trust structures where the trustees can reasonably be considered to act as agent for its beneficiaries with respect to all dealings with respect to the trust’s property shall be considered to be a trust for the purposes of section 150 of the ITA. As such, where a nominee (such as a corporation) holds real estate and/or investment accounts in trust for the beneficial owner(s), the heightened disclosure and reporting obligations will apply to the trust arrangement.
It is important to note that trusts that are required to file a T3 Return will be subject to additional disclosure proposed in section 204.2 of the Income Tax Regulations (“ITR”) for taxation years ending after December 30, 2023. Particularly, all such trusts or trust arrangements must report the (i) name; (ii) address; (iii) date of birth (for individuals); (iv) jurisdiction of residence; and (v) tax identification number (TIN) for the following persons in the year:
- the settlor;
- each of the trustees;
- any person who has the ability (through the terms or the trust or related agreement) to exert influence over trustee decisions regarding the appointment of income or capital; and
- each of the beneficiaries.
For the purposes of the ITR, a trust will generally be considered to have met the additional reporting requirements if the information listed above is disclosed for each beneficiary whose identity is known or ascertainable with reasonable effort at the time of filing the T3 Return.
The proposed legislation states that a false statement or omission on a T3 Return, made either knowingly or due to gross negligence, will result in a penalty that is equal to the greater of: (i) $2,500; and (ii) 5% of the highest amount at any time in the year of the total fair market value of the property held by the trust.
Although there remains some uncertainty regarding the timing and finality of the enhanced reporting obligations, it is now more important than ever for trustees and fiduciaries of a trust to maintain proper current documentation related to the trust and to ensure ongoing compliance with the ITA.