Written by Denise Coombs, Noseworthy Chapman
If you are a trustee of a trust, you have likely heard of the proposed changes to the trust reporting rules that were first announced in the 2018 federal budget as part of the government’s broader plan to crack down on tax avoidance. These proposed changes required extensive reporting for all trusts in Canada so as to assist the Canada Revenue Agency (“the CRA”) in assessing the tax liabilities for trusts and their respective beneficiaries and imposed significant penalties where these new reporting requirements were not met.
The old news
Generally, under the currently enacted rules, an inactive trust (other than a deemed resident trust) that has no tax payable is not required to file a tax return unless it allocates all or a part of its income or capital to its beneficiaries or it has disposed of capital property. Draft legislation to implement the 2018 budget proposals to expand the reporting requirements for trusts effective for taxation years ending on or after December 31, 2021 was first released for public comment in July 2018 but it was not enacted. Under those proposals, trusts that are resident in Canada (including deemed resident trusts) and non-resident trusts that would not otherwise be required to file a return would now be required to file a T3 return and report the identity of settlors, trustees, beneficiaries, and anyone who has the ability to exert control over the trust or override the trustee’s decisions regarding the distribution of income or capital. In addition to their name, each party’s address, date of birth (for an individual), jurisdiction of residence, and taxpayer number (such as a social insurance number of an individual, a business number of a corporation and the trust account number of a trust) must be disclosed.
Certain trusts are exempted from the new reporting requirements in the proposed legislation including mutual fund trusts, segregated funds, prescribed master trusts, trusts governed by registered plans (i.e., RRSPs, RRIFs, RDSPs, RESPs, TFSAs, DPSPs, pooled RPPs, etc.), lawyers’ general trust accounts, graduated rate estates, qualified disability trusts, employee life and health trusts, trusts that qualify as non-profit organizations or registered charities, trusts in existence for less than three months, and trusts that hold less than $50,000 in assets throughout the taxation year if their holdings are confined to cash, deposits, government debt obligations and listed securities.
To increase compliance with the new requirements, stiff penalties were introduced for failure to file a return or a schedule reporting the required information of $25 per day, with a minimum penalty of $100 and a maximum of $2,500. If the failure to file is made knowingly or due to gross negligence, a further penalty equal to 5% of the maximum fair market value of the trust property held by the trust during the year will apply. Current late-filing and non-filing penalties with respect to the T3 Return which can include a penalty of up to $25,000 or a fine and imprisonment continue to apply.
In anticipation of the December 31, 2021 effective date, accountants and trustees began the arduous task of gathering the newly required information, however the CRA was late releasing the schedule on which the information was to be reported and in January 2022 announced that it would defer the reporting requirement until the legislation was enacted.
On February 4, 2022, draft legislation was released which included the July 2018 proposals with a number of amendments. The legislation is now applicable to taxation years ending on or after December 31, 2022 and does not require the disclosure of information that is subject to solicitor-client privilege. Trusts for which all units are listed on a designated stock exchange are exempted from the proposals but arrangements where a trust can reasonably be considered to act as agent for its beneficiaries with respect to all dealings in all the trust’s property, i.e. “bare trusts” are now subject to the reporting requirements.
The new news
On August 9, 2022 the federal government released amendments to the current proposals to expand the lists of trusts excluded from the new reporting requirements to include a trust under an employee profit sharing plan, a registered supplementary unemployment insurance benefit plan and a first home savings account. The amendments provide that the reporting requirement will be met where the class of beneficiaries is sufficiently described to determine whether any particular person is a member of that class of beneficiaries when reporting on beneficiaries that are all members of certain Indigenous groups. The latest proposals also state that where not all of a trust’s units are listed on a designated stock exchange, the reporting requirement is met where the required information about the beneficiaries of those unlisted classes of units is reported.
So what’s the big deal?
Much of the required information under the new reporting proposals may not be readily available and the identity of certain beneficiaries may not be easily ascertained. By the very nature of trusts, much of the information about them is private and some beneficiaries may not even be aware that they are beneficiaries of a trust. How will a trustee explain to a beneficiary that they need their social insurance number to report to the CRA? With this additional administrative burden and with the risk of triggering a penalty, many trustees may consider resigning from their role leaving trusts scrambling to find replacement trustees. In the past, the role of a settlor was merely to establish a trust with a gift to the beneficiaries and there was little or nothing required of them beyond that original gift. Now with the increased scrutiny by the CRA, individuals may be less inclined to settle trusts in the future.
Where are we now?
Given the government’s ongoing campaign to search out and punish any taxpayer who has avoided tax by any means, including through the use of trusts, it is likely that these proposals will be enacted. The February 2022 and August 2022 announcements merely fine-tune the 2018 proposals. While trustees had a temporary reprieve of one year, the March 31, 2023 filing deadline is very quickly approaching and now is the time to complete the process of gathering the information that will now need to be reported.