On February 27, 2018, the federal government tabled the third budget ("Budget 2018"), which included a proposal to increase reporting requirements for trusts and impose penalties for failing to comply. This came as little surprise as the federal government had been contemplating ways to enhance the transparency of information related to trusts. As a result, trustees will be faced with additional reporting obligations. The proposal is aimed at diminishing the potential for taxpayers to engage in aggressive tax avoidance and tax evasion activities relating to trusts.
Currently, a trust that does not earn income or make distributions in a year is generally not required to file an annual T3 income tax return. Even if a trust is required to file a return for a year, currently, there is no requirement for the trust to report the identity of all of its beneficiaries. Given the absence of an annual reporting requirement and the limitations with respect to the information collected when reporting is required, there is an information gap with the information that is currently being collected.
To improve the collection of beneficial ownership information with respect to trusts and to assist the CRA in assessing the tax liability for trusts and its beneficiaries, Budget 2018 proposes to impose an obligation on certain trusts. That is, to file a T3 income tax return where one does not currently exist, and to provide additional information on an annual basis. The new reporting requirements will come into effect in 2021 and will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 income tax return.
The following trusts are exempt from the additional reporting requirements:
- Mutual fund trusts, segregated funds and master trusts;
- Trusts governed by registered plans (i.e., DPSPs, RRSPs, RRIFs, TFSAs, etc.);
- Lawyers' general trust accounts;
- Trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the tax year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities);
- Graduated rate estates and qualified disability trusts; and
- Trusts that qualify as non-profit organizations or registered charities.
Where the new reporting requirements apply, the trust will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust (i.e., a protector).
Budget 2018 proposes to provide funding of $79 million over a five-year period and $15 million on an ongoing basis to the CRA in order to support the development of an electronic platform for processing T3 income tax returns.
If the trustees fail to file a T3 income tax return, including a required beneficial ownership schedule, where required, there will be a penalty equal to $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500. If a failure to file was made knowingly, or due to gross negligence, an additional penalty will apply, equal to 5% of the maximum fair market value of property held during the relevant year by the trust, with a minimum penalty of $2,500.
This new reporting and compliance requirement for trusts will pose a heavy burden on trustees, and in the case of non-resident trusts, may lead to non-compliance due to lack of awareness or unwillingness to provide the information.