Canadian taxpayers would be forgiven for being at least slightly confused in recent months by the federal government’s new incoming (yet delayed) trust reporting requirements.
You’ll recall that in the 2018 federal budget, Ottawa laid out plans that would require all non-resident trusts to provide additional beneficial ownership information alongside the T3 returns they are currently required to file (assuming the trust has taxable income, capital gains or has made sales of capital property in the applicable tax year).
Those enhanced reporting obligations would also apply to express trusts that are resident in Canada, with a handful of exceptions. An ‘express trust’ is one created with a settlor’s express intent—think of a grandparent creating a trust in their will to hold property for a beneficiary, such as a minor grandchild.
As the government outlined, those proposed exemptions to the reporting requirement for trusts would include:
- Mutual fund trusts, segregated funds and master trusts
- Trusts governed by registered plans (i.e., deferred profit sharing plans, pooled registered pension plans, registered disability savings plans, registered education savings plans, registered pension plans, registered retirement income funds, registered retirement savings plans, registered supplementary unemployment benefit plans and tax free savings accounts)
- Lawyers’ general trust accounts
- Graduated rate estates and qualified disability trusts
- Trusts that qualify as non-profit organizations or registered charities
- Trusts that have been in existence for less than three months
- 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)
New trust reporting obligations
According to the Canada Revenue Agency, the change was being made to ‘assess the tax liability for trusts and its beneficiaries.’ This was widely perceived as another step the CRA was taking to try to ensure tax compliance and to minimize tax avoidance.
But the new rules would mean that a broader category of trusts would need to file T3 returns than had previously been the case—and with additional information disclosure requirements. Under the proposed changes, trusts would need to ‘report the identity of all trustees, beneficiaries and settlors of the trust (the individual or partnership transferring or lending property to the trust), along with each person who has the ability (through the trust terms or a related agreement) to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g., a protector).’ This would include those individuals’ names, addresses, dates of birth, residences and taxpayer identification numbers.
The new rules were originally intended to come into effect for the 2021 tax filing year. But because the legislation to implement this new measure is still pending, the Canada Revenue Agency in early February announced that it would continue to administer the existing rules for trusts.
The enhanced reporting and filing requirements, therefore, would be delayed and will likely only apply to taxation years ending after December 30th, 2022. As such, Canadians can file their 2021 T3 income tax return without meeting the new proposed reporting requirements.
The Department of Finance in February also released draft tax proposals for comment that included changes to the original proposed trust reporting requirements, so the final rules have yet to be finalized. The draft proposals include:
- Expanding the rules to include bare trust structures
- Exempting trusts listed on a stock exchange
- Exempting information subject to solicitor-client privilege
Proposed penalties for T3 filing non-compliance or not providing beneficial ownership information can reach a maximum of $2,500, with another potential $2,500 (or 5 per cent of the fair market value of property held in the trust in a given tax year) for knowingly neglecting to file a return. The consequences for ignoring the new rules, in other words, are not trivial.
Be proactive and gather information now
It’s important to note that these revised reporting requirements are quite burdensome, in particular because they apply to trusts that may have never been required to file a T3 return in the past. The trust that owns your family cottage, for example, will now be subject to this new reporting framework.
It’s safe to assume that these rules will, indeed, come into effect for the 2022 tax year. That’s why we’re advising clients to begin compiling the necessary information now to avoid missing filing deadlines. It also makes sense to work with your lawyer or accountant to fully understand your trust holdings—and whether some trusts in your portfolio could potentially be dissolved.
With that information in hand, be prepared to take action to optimize any trust structures in your business and personal wealth portfolio. The goal: avoiding costs related to maintaining ongoing compliance and avoiding potential non-compliance penalties.
Armando Iannuzzi, Co-Managing Partner
For more information on new trust compliance rules, contact a member of our team.