One of the most prevalent tax trends in recent years has centered on the concept of transparency. The need for transparency and the desire to enhance transparency is something that has been informing the changes being made by governments in Canada—as well as internationally—in an attempt to reduce tax evasion.
Enhancing transparency has often meant increasing taxpayer reporting requirements, with the most recent change being the increased trust reporting requirements originally announced in the 2018 federal budget.
Legislation surrounding these changes was recently released and taxpayers should be aware as those who are party to a trust may face a larger administrative burden with respect to that trust going forward.
What are the changes?
Generally, under the previous system, a trust would only have to file a T3 trust return in the case that it received income or made distributions to beneficiaries in the year.
This requirement is now being expanded to require that certain express trusts (described below) file a T3 return annually. Furthermore, certain parties to the trust will now be required to provide personal identification information such as their name, address, date of birth, tax identification number (such as social insurance number or business number) and jurisdiction of residence as part of the annual T3 trust return process.
The parties required to provide this information are
- settlors and
- persons who have the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust (such as protectors).
These requirements will apply to express trusts resident in Canada. The term express trust refers to trusts that have been created deliberately. The term therefore includes many of the most commonly used types of trusts, such as discretionary family trusts, testamentary trusts, and living trusts.
While these new rules will apply to a wide range of trusts, a number of exclusions are available for trusts that:
- Are mutual fund trusts, segregated funds, and master trusts
- Are governed by registered plans such as RRSPs and RRIFs
- Are graduated rate estates and qualified disability trusts
- Qualify as non-profit organizations or registered charities
- Have been in existence for less than three months at the end of the year
- Hold assets with a total fair market value not exceeding $50,000 throughout the year
To meet this exclusion, the trust may only hold assets that are cash, certain debt obligations, public traded shares or debt, shares of mutual fund corporations and an interest in a related segregated fund. This means that trusts holding shares of a private corporation, even with nominal value, will not apply
- Are required under the relevant rules of professional conduct or the laws of Canada or a province (such as lawyers’ trust accounts)
This change will increase the filing requirements for many trusts—specifically those with limited activity that would not have been required to file an annual return in the past. While this is a largely administrative burden, it is likely that the costs associated with administering the trust will increase in line with the increased administrative requirements.
It is therefore important for all parties to a trust to be aware of these changes, as the proposed penalties associated with these new disclosure requirements could be steep.
Should the required disclosures not be made by the trust’s T3 return filing deadline, a penalty that is equal to the greater of $100 and $25 multiplied by the number of days that the return is past due (to a maximum of $2,500) will be imposed.
Additional penalties will be incurred where the information is withheld knowingly, gross negligence has occurred or there is a failure to comply with a demand made by the CRA. Such penalties will be equal to the greater of $2,500 and five percent of the highest fair market value of the assets of the trust at that time.
These updated reporting requirements will come into effect for taxation years ending after December 30, 2021; meaning that a trust with a December 31 calendar year end will be required to meet these new requirements for its 2021 tax year.
While this leaves a reasonable amount of time for taxpayers to organize their affairs accordingly, when considered in combination with the new private corporation rules around income splitting, now is a great time to revisit the structure of your trust to assess whether it is set up in the most tax effective way. Your Grant Thornton tax advisor can assist you in this process.