Trusts are valuable tools used to separate the control and management of assets from ownership to benefit taxpayers. The Canadian Revenue Agency (CRA) announced new trust reporting rules to increase transparency and monitor trust in 2018. Bill C-32 changes the effective date of the new reporting rules to taxation years ending after December 30, 2023. Taxpayers should file their 2022 T3 as usual, since the CRA will advise them once their system has been updated and the forms have been published. Trustees must ensure possession of the necessary information to comply with the new trust reporting rules once effective. With the right preparation, taxpayers can avoid costly penalties down the road.
Trusts Must Report Tax Info
Trusts with tax payable or income/ capital distributions must file an annual T3 return. No personal information is required from trustees, beneficiaries, etc. No reporting is needed for Canadian trusts with no income or ‘bare trusts’.
New Rule: Express Trusts Must File Tax Return
Express trusts in Canada must file a T3 tax return even if they have no income to report. This includes trusts created to hold private company shares or personal property.
New Trust Tax Reporting
All trusts must file a T3 return and report more info starting in 2024, including bare trusts.
Reporting Trust Information
To combat tax avoidance and money laundering, trusts must inform government agencies about trustees, beneficiaries, settlors, and protectors. All mundane trusts must be compliant with the new rules from March 30, 2024, when filing their 2021 T3 returns. The required information to disclose are as follows:
• Date of Birth
• Taxpayer Identification Number and/or Social Insurance Number
All information on possible beneficiaries of the trust (including contingent beneficiaries) must be provided to the government as part of the annual tax return filing even if the trust does not have any income to report. Commercial loans and transfers for value by arm’s length transaction do not create a settlor relationship. Regardless, all mundane trusts must comply with the new rules.
Trusts Exempt from Extra Reporting
The following types of trusts that are resident in Canada (including non-resident but required to file a T3 return) are exempted from providing the supplementary information:
• Trusts that are part of registered plans (for example, registered pension plans or tax-free savings accounts)
• Mutual fund trusts, segregated funds and master funds
• Lawyers’ general trust accounts
• Graduated rate estates and qualified disability trusts
• Trusts that are non-profit organizations or registered charities
• Trusts that have been in existence for less than three months, and
• Trusts that hold less than $50,000 in assets throughout the taxation year.
Understanding these different types of trusts and their tax implications will help make informed decisions regarding the management and protection of assets.
Penalties for Failing to Comply with Trust Reporting Rules
Trusts that are obligated but fail to provide the necessary information are subject to a penalty of $25 per day outstanding with a minimum penalty of $100 and a maximum of $2500. If the disinformation was intentional, an additional penalty of 5% of the maximum value of the trust’s property held that year will be applied, with a minimum of $2,500. Existing penalties in respect to the T3 return will continue to be applied.
Reviewing Trust Provisions:
To ensure the correct tax payments, tax departments are introducing new information requirements:
• Limits on the amount of corporate small business deductions for associated groups of companies.
• Limits on tax-deferred transfers withdrawn from a trust to Canadian residents.
• Application of new Underused Housing Tax to trusts if the beneficiary is a non-resident of Canada.
Identifying Associated Corporations
The CRA is making it easier to identify associated companies for the purpose of restricting the availability of small business deductions. The deduction benefit allows for a low corporate tax rate on the first $500,000 of active business income whereas all associated corporations should share one small business deduction. Additionally, if a minor is listed as a beneficiary, the parent(s) are deemed to own 100% of the shares until 18 years of age.
Tax Implications of Trusts with Non-Resident Beneficiaries
Trusts with non-resident beneficiaries must be aware of the 21-year deemed disposition rule: Disposal of the capital property at fair market value will occur on the trust’s 21st anniversary creating a significant tax liability. Before this date, trustees have the right to distribute the capital to the Canadian resident(s) to avoid an immediate tax consequence. Any distributions to non-resident beneficiaries (before or after year 21) are deemed to be disposed of by the trust at fair market value and will be immediately taxed.
CRA Updating Trust Return Processes
Online applications for trust account numbers and electronic filing for 2021 T3s have been modernized. The implementation of mandatory e-filing of T3 returns is proposed to begin in 2024 and will allow for a better analysis and assessment of information including any new beneficial ownership details.
Understanding FATCA and CRS for Trust Reporting
FATCA is an American law which requires non-U.S. financial institutions to report IRS accounts held by U.S. residents and citizens. CRS is the global standard for the exchange of financial account information. Trustees must ensure that their reporting disclosures are consistent with FATCA and CRS. Financial institutions must inform the CRA if the controlling persons identified by the trust are US persons or other non-Canadians. As a result, submission must be reviewed before submission for discrepancies with new trust reporting rules.
Final Considerations for New Trust Tax Reporting Rules
It is crucial that trustees identify and communicate with all relevant parties to receive the required information prior to document submission. Consider unwinding trusts that are no longer needed to avoid the reporting obligations. Finally, be vigilant of the increased tax audit risks which will surely arise.