Under the current rules, a trust (including a deemed resident trust) is generally only required to file an annual trust income tax and information return (a “T3 return”) if it has taxes payable or it made distributions (whether on account of capital or income) to any of its beneficiaries.
In other words, a trust that is inactive, such as one that only holds shares of a private company that did not pay any dividends and that made no distributions to its beneficiaries, would generally not need to file a T3 return.
For certain trusts with taxation years ending on or after December 31, 2021, the rules are changing such that the non-filing exemptions may no longer apply.
Budget 2018 proposed significant amendments to income tax rules relating to trusts. These amendments would allow the Canada Revenue Agency (CRA) to collect additional beneficial ownership information with respect to trusts and to more accurately assess the tax liabilities of trusts and beneficiaries.
Under the proposed amendments, all express trusts that are resident in Canada, and non-resident trusts that are currently required to file a T3 return, would be required to file a tax return, subject to certain exceptions described below.
An “express trust” generally means a trust created intentionally by a settlor (usually made in writing).
Under the proposed rules, a trust with no income to report would be required to file a T3 return unless it fits into one of the exceptions.
The second aspect of the proposed amendments would require disclosure of the identity of the following persons on an annual basis:
Such disclosure would be made on a yet to be released new schedule within the T3 return:
The additional disclosures would apply even if the above persons were a trustee or beneficiary for only a single day in the year. The new schedule must be attached to the trust’s T3 return and cannot be filed on its own.
Currently only a limited amount of this kind of information was disclosed when distributions were made to beneficiaries.
There would be exceptions to the proposed T3 filing requirements and additional disclosure requirements.
Non-express trusts (including graduated rate estates) are excluded from the proposed rules. Certain express trusts are also excluded from the proposed rules. Examples include express trusts that:
It appears that express trusts otherwise meeting the second exception above, but that were settled with a gold coin instead of a $10 bill, for example, would not meet the second exception criteria.
New penalties were also proposed in Budget 2018. Failure to file a T3 return, including the additional disclosure requirements, may result in a $25 per day penalty (with a minimum penalty of $100) up to a maximum of $ 2,500. If a failure to file the return was made knowingly, or due to gross negligence, an additional penalty equal to 5% of the maximum value of property held during the year by the trust may apply with a minimum penalty of $2,500.
The existing penalties for T3 returns will also continue to apply.
The proposed amendments will, if enacted as proposed, apply to taxation years ending after December 30, 2021 and onwards.
The earliest time for most trusts to file a T3 return under the proposed disclosure requirements will be for the 2021 tax year (with a filing date in 2022). However, several matters should be given consideration now: