Trusts have been a staple in tax and estate planning, providing flexibility, control and asset protection. Trust arrangements come in many forms and are tailored to serve a variety of specific purposes.
Proposed legislation that significantly expands trust reporting requirements was first introduced in 2018, for taxation years ending on or after December 31, 2021. While those proposals were not enacted to law, additional proposed legislation on these requirements was introduced on February 4, 2022 and most recently, on August 9, 2022.
The primary purpose of these amendments is to increase transparency regarding beneficial ownership and assist the Canada Revenue Agency (CRA) in properly assessing the tax liabilities for trusts and their respective beneficiaries. These additional CRA disclosure requirements are concurrent with the introduction of the Quebec Nominee Agreement disclosure requirement and enactment of British Columbia’s Land Owner Transparency Act, all forming a significant movement toward increased disclosure and transparency, where previously some degree of privacy had been afforded.
The most recent legislative proposals will apply to taxation years ending after December 30, 2022, which means trusts with a December 31 year end will be subject to these rules starting with their 2022 taxation year.
A) T3 Filing Requirement
Under the current legislation, a trust resident in Canada is generally not required to file an annual T3 income tax return unless tax is payable by the trust for the year, or the trust disposes of capital property. The CRA has provided further administrative relief where only nominal income was earned by a trust or allocated to resident beneficiaries.
The proposed legislation drastically limits these broad exceptions. Most personal trust residents in Canada will now be required to file an annual return even where there is no income tax liability and the trust made no distributions or allocations during the year. Trusts that include an arrangement where a trust can reasonably be considered to act as an agent for its beneficiaries, commonly known as “bare trusts”, will be expressly subject to the new reporting requirements.
Limited exceptions continue to be provided for trusts which:
- have been in existence for less than three months at the end of the year; or
- hold less than $50,000 in assets throughout the taxation year (provided that their holdings are confined to cash, certain debt obligations and listed securities)
Private company shares are not listed securities. Consider a common situation where a family trust holds private company shares: even where the family trust receives no dividends from the private company, it will still be required to file a trust return every year under these rules.
Types of trusts specifically exempted from this new reporting requirement include:
- Regulated trusts such as lawyers’ general trust accounts;
- Trusts that qualify as not-for-profit organizations or registered charities;
- Mutual fund trusts, segregated fund trusts and master trusts;
- Qualified disability trusts;
- Employee life and health trusts;
- Certain government funded trusts;
- Graduated rate estates;
- Trusts with all units listed on a designated stock exchange;
- Employee profit sharing plans;
- Registered supplementary unemployment benefit plans;
- First home savings accounts;
- Registered savings plans (i.e. RRSP, RESP, TFSA etc.); and
- Cemetery care trusts or a trust governed by an eligible funeral arrangement.
Trusts created to hold only personal-use assets for estate planning or asset protection purposes may have qualified previously for the filing exception, but would no longer qualify under the new rules. Extension of the new rules to bare trusts is significant. Many bare trust arrangements, such as those commonly used in joint ventures, real estate holdings, or probate planning, that were previously not subject to T3 reporting requirements will now have to consider the additional costs of compliance.
Additional Information Requirements
The current prescribed T3 forms and schedules require only limited information regarding the parties to the trust.
Under the proposed regulations, every trust that must file a T3 return must disclose information which includes the name, address, date of birth, jurisdiction of residence and taxpayer identification number (TIN) (i.e. social insurance number, business number, trust account number or foreign TIN) for each:
- settlor and;
- each person who has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust.
To the extent that accounting records for the income and capital of the trust have not been maintained, it will be prudent to start now so that all relevant transactions which could give rise to additional settlors are identified.
A ‘settlor’ for purposes of the new disclosure extends beyond the person who established the trust and will likely include non-arm’s length persons who participated in an estate freeze in favour of a trust, sold property or loaned money or property to the trust, or paid expenses on behalf of the trust.
Quebec had announced in its 2021-22 provincial budget that it would harmonize with the proposed federal changes on the required additional information disclosures. While Revenu Quebec announced earlier this year that it would relax the reporting obligation for 2021 returns, it is expected that the Quebec reporting will be required in 2022 if the federal proposals are enacted.
B) Non-compliance Penalties
The existing penalties for failure to file a T3 return by the due date continue to apply. Likewise, failure to distribute and file any trust-related information slips will also continue to attract the usual late-filing penalties.
The proposed legislation adds to the list of potential penalties. [PULLEDQUOTE] If a false statement, omission or failure to file a return was made by any person knowingly or under circumstances amounting to gross negligence, that person could face a penalty equal to the greater of $2,500 and five percent of the highest fair market value of the trust assets during the year.
This proposed penalty applies regardless of the magnitude of an error or omission in the required disclosures. Accordingly, it is critical that persons required to file under the new trust reporting rules can demonstrate they have acted with reasonable care in meeting the new reporting and disclosure requirements.
Are You Ready?
There remains uncertainty as to the final form of the legislation and when it will be enacted, but the intent is clear: many trusts will be required to file for the first time and information not previously required will now have to be ascertained and disclosed.
Taxpayers should work with advisors to identify trust arrangements with non-active assets or personal-use assets, as well as bare trust arrangements, as they will likely be subject to the new trust reporting requirements. Trustees are encouraged to begin assembling the requisite information well in advance of December 31, 2022. For some arrangements, gathering the necessary information will be relatively straightforward. For others the task may be more onerous, and failure to comply will attract harsh penalties.
For trust arrangements which no longer serve their intended purpose (tax or non-tax), the merits of winding up the trust might be considered. Likewise, if a trust is approaching its twenty-first anniversary, accelerating the planning for that event due to the increased reporting might be considered.
For more information on how the new trust reporting rules affect can affect you, contact your MNP Business Advisor.