Canadian Tax and Estate Planning

The Department of Finance has released new draft legislation on the Canadian trust reporting and filing requirements.

Who’s impacted?

The new legislation will impact the following types of trusts:

• Express trusts residents in Canada
• Bare trusts
• All non-resident trusts that currently file T3 returns

An express trust is a trust that was created with the settlor’s express intent which is generally expressed in writing.

Express trusts are separate from resulting or constructive trusts (these two categories of trusts are usually created by courts under certain circumstances) as well as trusts that result from the operations of various statutes.

Bare trusts include such situations as a nominee corporation holding title to a commercial property or a family cottage, and “in trust for” bank accounts (e.g., parents opening an in trust for a bank account for their minor children).

Bare trusts are only considered trusts for T3 return filings, and not for any other purposes.

The new rules will apply to the trusts with year-ends on or after December 30, 2022 and would require T3 returns to be filed for such trusts. Due to the periods impacted by the change, the new rules will likely affect most 2022 trust tax filings, which are due on March 31, 2023.

What’s exempt?

Certain trusts are exempt from the new filing and reporting requirements:

• Trusts that were in existence for less than 3 months at year end
• Trusts that held less than $50,000 in certain assets throughout the tax year, such as cash, certain debt obligations, and listed securities. Any trusts that hold the shares of private companies would still be required to file
• 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 (GREs)
• Trusts with all units listed on a designated stock exchange
• Employee profit sharing plans
• Registered supplementary unemployment benefit plans
• Trusts governed by registered plans (i.e., RRSP, RESP, TFSA etc.); or
• Cemetery care trusts or a trust governed by an eligible funeral arrangement

Reporting requirements

The current rules

In prior years, trusts were not required to file a T3 return for a tax year unless one of the following conditions was met:

• Had to pay taxes for the year
• Made income or capital distributions to beneficiaries
• Disposed of capital property

The new rules

The new rules will require impacted trusts to file a T3 regardless of their past filing obligations.

In addition to filing a T3 return, as part of the new reporting and filing requirements, the trusts will also need to complete a schedule disclosing information about all trustees, beneficiaries, settlors, and those who can exert control and override the decisions of Trustees.

The required information to be disclosed will include:

• Name
• Type of entity
• Address
• Date of birth (if applicable)
• Jurisdiction of residence
• Taxpayer Identification Number (SIN, trust number, business number, TIN)

Trusts will be required to file this form each year to ensure that this information is up to date. For the disclosure form, the term “settlor” of the trust will include anyone who transferred or lent any property to the trust, other than:

• An arm’s length transferor who transferred property to the trust for a fair market value consideration; or
• An arm’s length lender, who charges a reasonable rate of interest on the loan made to the trust.

For beneficiaries, each beneficiary of the trust whose identity is known or ascertainable is required to be disclosed. In addition, terms of the trust that allow extending the class of existing beneficiaries (e.g., current children of the settlor) to any future individuals (e.g., unborn children of the settlor) also need to be disclosed.

Penalties

Penalties can apply when a T3 return for a trust is not filed by the stated deadline. The late filing penalty is $25 per day for each day past the deadline, with a minimum penalty of $100, and a maximum of $2,500.

However, if there was gross negligence or the failure to file or disclose required information was done knowingly, the additional penalty is the greater of $2,500 and five per cent of the highest fair market value of the property held at any time in the trust for the tax year.

How Fuller Landau can help

For more information on how the new reporting rules can affect you, please reach out to the Tax Group at Fuller Landau.