Update: Subsequent to the publication of the below article, amendments to the legislative proposals have been enacted postponing the implementation date of the described rules to taxation years that end on or after December 31, 2023, and broadening the application of the new enhanced filing and reporting requirements to bare trust arrangements.
Subsequent articles published on March 11, 2022 (Delayed Implementation of New Trust Reporting and Disclosure Requirements) and January 24, 2024 (Important Reminder of New Trust Reporting Requirements) detail the updated new reporting requirements for Trusts.
The 2018 Federal Budget proposed new trust reporting and disclosure requirements in an attempt to improve the collection of beneficial ownership information and to help the Canada Revenue Agency assess the potential tax liabilities for trusts and their beneficiaries.
Accordingly, effective for taxation years ending on or after December 31, 2021, changes to legislation and CRA’s administrative practice will impose a filing requirement for most trusts that were previously exempt from filing a T3 Trust and Income Tax return.
Currently, trusts that do not earn income or make distributions generally are not required to file a T3 return. However, starting next year, most inactive trusts will have to file a T3 return and will also be subject to new increased disclosure requirements.
Some examples of trusts that are not currently obligated to file a T3 return, but will be subject to these new requirements are as follows:
- Family trusts that hold personal-use property (i.e.: cottage, Florida vacation home); and
- Trusts holding shares of a private company, which have not reported prior dividends or capital gains.
Note that there are some exceptions to these new requirements including (but not limited to) graduated rate estates and qualified disability trusts.
New disclosure requirements
The new requirements will necessitate the disclosure of personal information with respect to various persons associated with a trust.
For example, the following details with respect to each and every settlor, trustee, beneficiary, or any person that can exert influence over trustee decisions will need to be disclosed:
- Name;
- Address;
- Date of birth (individuals);
- Jurisdiction of residence; and
- Taxpayer identification number (i.e.: social insurance number, business number).
Trusts that fail to comply with the new reporting requirements and/or mandatory information disclosures may be subject to punitive penalties.
In addition to the standard failure to file penalties, new penalties have been introduced that may apply in circumstances where it is determined that a false statement or omission has been made knowingly, or in circumstances of gross negligence. These penalties range from a minimum of $2,500 to 5% of the highest fair market value of all properties held by the trust in the year.
Recommended Course of Action:
Although the changes described above will only apply to trusts with taxation years ending on or after December 31, 2021, we advise taking a proactive approach to prepare for these new reporting and information disclosure requirements.
Accordingly, taking the following steps prior to December 31, 2020 is recommended:
- Determine whether trusts continue to serve a relevant purpose, and consider winding-up inactive trusts that are no longer required before the end of calendar year 2020;
- To avoid unnecessary disclosure of information to CRA, consider removing and/or changing extraneous trustees or beneficiaries. (Important Note: the trust deed should be reviewed to ascertain any potential negative tax consequences related to a change in trustees or beneficiaries); and
- Obtain required disclosure information with respect to any reportable persons.
For further guidance on the impact of these new trust reporting and disclosure requirements on your current structure, please contact your Shimmerman Penn advisor.
