In February 2018, the federal government tabled its annual budget, which contained proposals to require certain trusts to file T3 Trust Income Tax and Information Returns (T3 returns) and to provide certain information with respect to the trust’s settlor(s), trustees, beneficiaries and protectors. On July 27, 2018, draft legislation was released which would give effect to this proposal. The changes apply to 2021 and subsequent tax years.
The New Rules
Prior to the introduction of these new rules, a trust would, generally, only file a T3 return in the event that it had received income or made a distribution to one or more of its beneficiaries. Beginning in 2021, certain “express trusts” (which includes typical family trusts commonly used in tax planning), including trusts deemed resident in Canada under section 94 of the Income Tax Act,[1] are required to file a T3 return annually.[2]
The identity and other information of certain parties to the trust must also be disclosed. Settlors, trustees, beneficiaries and other persons who have the ability to exert control over trustee decisions with respect to the income or capital of the trust (often referred to as “protectors”) must disclose to the CRA information such as their name, address, date of birth, social insurance number of business number, and their jurisdiction of residence.[3]
These new reporting rules will not apply to trusts governed by registered plans, lawyers’ general trust accounts, graduated rate estates and qualified disabilities trusts, trusts which qualify as non-profit organizations and registered charities and trusts which have been in existence for fewer than three months.[4]
The New Penalties
New penalties have been introduced to accompany the new reporting rules. A failure to file penalty will equal $25 per day for the failure to file (or the failure to provide the additional information required) with a minimum $100 penalty and up to a maximum of $2,500. A gross negligence penalty may also apply if the failure to file the return was made knowingly or due to gross negligence. The additional penalty will be equal to 5 percent of the maximum fair market value of the property held by trust during the relevant year (with a minimum penalty of $2,500).
[1] RSC, 1985, c.1 (5th Supp.).
[2] Subsection 150(1.2), a “reporting trust” is required to file a T3 return whether or not it has tax payable or has made distributions.
[3] Regulation 204.2(1) provides what information must be filed in the T3 return.
[4] Full list of exceptions is found in subsection 150(1.2) to the new reporting requirements.