As a part of the 2018 federal budget, the Canadian government introduced new trust tax return and information reporting requirements for express trusts (see footnote 1) and non-resident trusts. These changes will apply to certain trusts with taxation years ending on or after December 31, 2021 and will create T3 “Trust Income Tax and Information Return” filing obligation for certain trusts that do not currently have a filing requirement. Trustees should be aware of these reporting changes as there could be substantial penalties for non-compliance.
Trusts: New Information Reporting Effective for 2021 and Subsequent Taxation Years
For taxation years ending on or after December 31, 2021 the new reporting will require express trusts and non-resident trusts to file a T3 return and for each of the settlor, the trustee(s), the beneficiary(ies), and any person who the trust assigns influence over trustee decisions regarding appointment of income or capital of the trust (such as a trust protector(see footnote 2)) to report:
- Full name
- Mailing address
- Date of birth (if individual)
- Jurisdiction of residence and
- Taxpayer identification number (TIN)
Even if the trust has no income, the trust will have to report the additional information by filing the new schedule along with the T3 return. This information must be filed with the T3 trust return and cannot be filed separately. The identifying information must be provided for any trustee or beneficiary even if they only hold that role for a part of the taxation year.
Non-Compliance to Additional Reporting Requirements
If a trustee or beneficiary does not want to provide the required identification information to CRA, steps must be taken to remove that individual from the trust to avoid non-compliance penalties .
Trusts which fail to file the T3 return with the new reporting requirements will be issued a non-compliance penalty equal to $25 per day (minimum $100) up to a maximum $2,500. Gross negligence penalties from a minimum $2,500 up to 5% of the fair market value of the property held in the trust may also apply if statements on the return are knowingly or negligently false.
Where the identity of a beneficiary cannot be determined, steps must be taken to provide CRA with detailed information obtained while investigating whether an individual is a beneficiary of the trust.
Exemptions to the New Filing Requirements
The following trusts are exempt from the new filing requirements:
- Non-express trusts (see footnote 1)
- Trusts governed by registered plans such as RRSPs, TFSAs and RESPs;
- Graduate Rate Estates and Qualified Disability Trusts (QDTs);
- Mutual fund trusts, segregated funds and master trusts;
- Lawyers’ general trust accounts;
- Trusts that qualify as non-profit or registered charities;
- Trusts that have existed for less than 3 months; and
- Trusts that hold less than $50,000 in assets throughout the taxation year (provided that their holdings are confined to deposits, government debt obligations and listed securities).
Another common type of trust is a bare trust. The most frequent use of bare trusts is to hold legal title of real estate (residential or commercial), in trust for a beneficiary. The legal and beneficial interest in the real estate is separated between the trustee and beneficiary. Trustees in a bare trust take no part in the active management of the trust property, instead relying on instructions from the beneficiaries of the bare trust. One benefit of the bare trust in BC is for beneficial ownership of real estate to change hands without legal title changing avoiding property transfer tax.
While many bare trusts would fall within the meaning of an “express trust” and are not specifically exempt in the proposed legislation, subsection 104(1) of the Income Tax Act would appear to continue to exclude bare trusts from the application of the proposed changes.
Tax and Estate Planning for Upcoming Changes in 2021
Where the settlor of a trust does not wish for beneficiaries of their estate to be known prior to their death, consideration should be made as to whether a Will directing beneficial ownership after their passing would be more appropriate than to hold a trust as a Will substitute where additional reporting will be required annually.
Trustees should be aware of these changes to the filing requirements as the liability for income tax and information reporting (and thus non-compliance penalties) rests with those acting in this fiduciary capacity.
Where all trust assets have been disposed of and distributed, the trustee is required to windup the trust. Trustees should review the intention on original creation of the trust to see if the trust still serves a beneficial purpose under the new filing and reporting rules.
Next Steps
The proposed changes present many potential issues and if you have any questions regarding these upcoming changes affecting express trusts or are seeking any trust or estate planning advice, please contact one of our staff at Cameron Izard Snell LLP to assist you.
The reporting requirements discussed and advice thereon are based on current tax laws and does not constitute legal advice. A lawyer should be consulted prior to adding or removing any trustees or beneficiaries.
If you have any questions or would like assistance please contact your tax advisor at Cameron Izard Snell LLP.
Footnotes:
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An express trust is generally a trust created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the intervention of a court). For this reason most trusts are express trusts. The opposite is referred to as an implied trust where the court is trying to right a wrong or clear up a misunderstanding. To avoid an implied trust, the settlor should create documents that clearly express the planner’s wishes to avoid the courts.
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A trust protector is a person appointed under the trust instrument to direct, guide or even restrain the trustees in relation to their administration of the trust.
