Author: Stephanie Chang CPA, CMA
Editors: Peter Weissman FCPA, FCA, TEP and Matthew Cho CPA, CA, TEP
As part of the Canadian government’s efforts to combat money laundering, aggressive tax avoidance and tax evasion activities relating to trusts, enhanced income tax reporting requirements for certain trusts will be required for the 2021 and subsequent taxation years. The new rules also contain harsh penalties for knowingly fail to comply with the new trust reporting requirements or non-compliance due to gross negligence.
The Current Rules
Under the current legislation, a trust is generally required to file a T3 return if the trust has tax payable or distributes all or part of its income or capital to its beneficiaries during the year. An inactive trust or a trust that has no income or tax payable during the year is generally not required to file a T3 return. [1]
A Canadian resident trust, for instance, in which the only asset is a vacation property with no income during the year may not have a T3 return filing obligation under the current rules.
The New Trust Reporting Requirements
With the new requirements, a trust that is resident or deemed resident in Canada and is an express trust (generally a trust created with the settlor’s express intent and usually made in writing), must file a T3 return on an annual basis even if the trust is inactive or has no income in a year. There are limited exceptions to the rules.
Under the new reporting regime, the name, address, date of birth (for a natural person), jurisdiction of residence and taxpayer identification number (TIN) for each settlor, trustee, beneficiary and person who exerts control or can override trustee decisions over the allocation of income or capital of the trusts, such as a protector, must be reported on a new required beneficial ownership schedule (the “new schedule”) to accompany the T3 return. The new schedule cannot be filed alone.
The vacation property trust mentioned will be required to file a T3 return and disclose all the beneficial ownership information for the 2021 and subsequent taxation years.
Penalties
For a trust that is subject to T3 return filing requirements but fails to do so or fails to provide the additional required information under the new legislation, the penalty is $25 for each day of delinquency with a minimum penalty of $100 and a maximum penalty of $2,500. Gross negligence penalties may also apply for making a false statement, omission or failure to file. This penalty is equal to 5% of the total maximum value of all properties held during the relevant year by the trust with a minimum penalty of $2,500.
Continuing with our example above, if the vacation property held by the trust is valued at 1 million Canadian dollars, the penalty could be $50,000 in a single year if the trustees knowingly fail to comply with the rules.
Exceptions
The new rules do not apply to trusts that are not express trusts, and even some express trusts. The following are some, but not all, express trusts not subject to the new rules:
- Trusts governed by registered plans (e.g., DPSPs, PRPPs, RDSPs, RESPs, RPPs, RRIFs, RRSPs, RSUBPs and TFSAs);
- Graduated rate estates and qualified disability trusts;
- Lawyers’ general trust accounts;
- Trusts that qualify as non-profit organizations or registered charities; and
- Trusts that have been in existence for less than three months
Recommendation
As 2021 is soon upon us there is not much time to plan. The following are some items for considerations:
- Advise trustees on these new requirements as soon as possible;
- Consider formally winding up dormant trusts or trusts that no longer serve a purpose prior to January 1, 2021;
- Consider beneficiary, trustee and protectors changes prior to 2021 but, remember, these changes could have significant income tax implications;
- Locate trust documents so you can identify each person that must be reported (e.g., settlors, trustees, beneficiaries and protectors). Additional care should be given in situations where the trust has one or more class of beneficiaries (e.g., corporate beneficiaries).
If you have any questions regarding the new trust reporting requirements, a Cadesky Tax representative will be happy to assist you.
[1]Although there is some risk of penalty for not filing an information return
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The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
