Published: March 6, 2020
Last Updated: March 1, 2022
2018 Federal Budget – New Trust Reporting Requirements – A Toronto Tax Lawyer Analysis
In the 2018 Federal Budget released by the Canadian Department of Finance of February 27, 2018, new trust reporting requirements are designed to provide the CRA more information and to help ensure that trusts are paying taxes appropriately.
Trusts Affected by the New Reporting Requirements
The new reporting requirements broadly apply to all express trusts resident in Canada as well as to non-resident trusts that are currently required to file T3 returns. An express trust is one that arises from the explicit instructions of the settlor which includes what people generally think of when discussing a trust such as living trusts, testamentary trusts, discretionary trusts, fixed trusts, and bare trusts. Non-express trusts are ones that are imposed by courts such as constructive trusts and resulting trusts which are not captured under the new rules. However, there are some express trusts included in the above that are exempt from these new rules. Specifically, the following types of express trusts are exempt:
- Mutual fund trusts, segregated funds, and master trusts;
- Trusts governed by registered plans;
- Lawyers’ general trust accounts;
- Graduated rate estates and qualified disability trusts;
- Trusts that qualify as non-profit organizations or registered charities; and
- Trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (the $50,000 asset exemption only applies where the holdings are confined to deposits, government debt obligations and listed securities)
Effect of the New Reporting Requirements
Trusts that are caught under the new reporting requirements will be required to file annual T3 returns and provide additional information compared to the current regime. The trusts will need to report the identity of all trustees, beneficiaries, and settlers of the trust. Furthermore, the trust will also need to report the identities of each person who, through the trust terms or other related agreements, has the ability to exert control over trustee decisions regarding the appointment of income and/or capital of the trust, often referred to as a ‘protector’. However, the new rules are not coming into effect immediately and Canadians will have until the 2021 taxation year to ensure that they are prepared to comply with these rules. Call our top Toronto tax firm and learn more about trusts and their obligations.
Accompanying the new rules, the 2018 Budget is also introducing various penalties for trusts that fail to file a T3 return and where a T3 is filed without the required beneficial ownership schedule. The contemplated penalty operates similarly to the current penalties for a failure to file a T1135 information return. The standard penalty will be calculated at $25 each day after the filing deadline with a minimum penalty of $100 and a maximum penalty of $2,500. Where the failure to file the T3 return is made knowingly or due to gross negligence, an additional penalty will apply equal to 5% of the maximum fair market value of the property held during the relevant year by the trust with a minimum penalty of $2,500. It is currently not clear from what the Department of Finance has published whether the additional penalty will apply in addition to the standard penalty or whether it will function like the T1135 penalty where additional penalties take into account previous penalties that have already been applied.
Federal Budget Changes Tax Tip – Determine Whether these New Rules will Apply to Your Trust Before They Come into Effect
Although the new rules will not come into effect until the 2021 taxation year, it is advisable to determine whether the new rules will be apply to a trust with which you are connected. Speak to one of our experienced Toronto tax lawyers to see if one of the exemptions apply and learn more about how to meet these new requirements if the trust is not exempt.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."