Under the current rules, a trust doesn’t have to file a T3 return if it did not earn income or make distributions in the year. Even if a trust is required to file a T3, it doesn’t have to report the identity of all its beneficiaries. In Budget 2018, Finance Canada expressed that there are “significant gaps with respect to the information that is currently collected with respect to trusts.”
To combat this, Finance is proposing more reporting requirements for express trusts: a trust created with the settlor’s express intent, usually made in writing (as opposed to a resulting or constructive trust, or certain trusts deemed to arise under the provisions of a statute).
When Do These Rules Apply?
The following new rules begin for taxation years that end after December 30, 2021.
Which Trusts Have to Follow the New Reporting Rules?
New subsection 150(1.2) requires that a trust that is resident in Canada (including trusts that are deemed residents under section 94) and that is an express trust file a tax return even if it meets one of the exceptions to filing a return listed in subsection 150(1.1).
The exceptions to the reporting requirements in new subsection 150(1.2) are as follows:
- trusts that have been in existence for less than three months;
- trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the year, where the only assets held by the trust throughout the year are one or more of
- certain government debt obligations,
- a share, debt obligation or right listed on a designated stock exchange,
- a share of the capital stock of a mutual fund corporation,
- a unit of a mutual fund trust, and
- an interest in a related segregated fund (within the meaning assigned by paragraph 138.1(1)(a) of the Act);
- trusts that are required under the relevant rules of professional conduct or the laws of Canada or a province to hold funds for the purposes of the activity that is regulated under those rules or laws, provided the trust is not maintained as a separate trust for a particular client or clients (this provides an exception for a lawyer’s general trust account, but not for specific client accounts);
- trusts that qualify as non-profit organizations or registered charities;
- mutual fund trusts, segregated funds and master trusts;
- graduated rate estates;
- qualified disability trusts;
- employee life and health trusts;
- certain government funded trusts;
- trusts under or governed by a deferred profit sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund or registered retirement savings plan; and
- cemetery care trusts and trusts governed by eligible funeral arrangements.
New Reporting Requirements – Information About Trustees, Beneficiaries, and Settlors: Reg 204.2
Trusts that are required to file a return have to provide additional information outlined in section 204.2 of the Regulations.
This additional information includes the name, address, date of birth, jurisdiction of residence and taxpayer identification number for the following persons:
- trustees, beneficiaries or settlors of the trust; or
- persons who have the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust. This would include, for example, a protector of the trust.
Trustees don’t always know the identity of a beneficiary. For example, the trust may provide for a class of beneficiaries that includes the settlor’s current children and grandchildren and any children or grandchildren that the settlor may have in the future. In these cases, Regulations 204.2(2) provides that the requirement to provide information about the beneficiaries of a trust is met if:
- the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return; and
- for beneficiaries whose identity is not known or ascertainable with reasonable effort by the person making the return, the person making the return provides sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.
Finance notes that in these circumstances the reporting requirement will be met if the relevant information in respect of all of the settlor’s current children and grandchildren are included as well as the details of the terms of the trust that extend the class of beneficiaries to any of the settlor’s future children or grandchildren.
Failure to comply could result in penalties from $2,500 to 5% percent of the highest total fair market value of all the property held by the trust in the year.