The T3 trust return: change in reporting obligations
Pursuant to the 2018 Federal Budget, there will be new trust reporting requirements coming into effect for taxation years ending after December 31, 2021.
Prior to the implementation of the forthcoming changes, a Trustee would only have to file a T3 trust return if the trust generated income or distributions were made to beneficiaries during the year.
In addition to this expanded filing requirement, certain parties to the trust (such as trustees, beneficiaries and settlors) will soon be required to provide personal identification information including: names, addresses, dates of birth, social insurance numbers (or in the case of a business, a business number), as well as their jurisdiction of residence.
These requirements will apply to express trusts resident in Canada. The new proposed provisions of the Income Tax Act (the “ITA”) would extend the application of these new requirements to include express trusts that are deemed to be resident in Canada pursuant to section 94 of the ITA.
Express trusts can be loosely defined as those created “on purpose,” that is, the trust is set in express terms, usually in writing, and can be distinguished from trusts that are implied by conduct.
There are exceptions to the application of these changes, including, among others:
- Trusts that have been in existence for less than three months at the end of the tax year;
- Employee life and health trusts;
- Graduated rate estates;
- A lawyer’s general trust account (but not specific client accounts);
- Qualified disability trusts; and
- Trusts that are governed by registered plans such as RRSPs and RRIFs.
Trustees managing trusts that do not fall within one of the enumerated exceptions, may be reluctant to make the disclosure required by these changes, especially where there is a preference to keep personal matters related to the trust private. In such cases, the changes may encourage Trustees to take early steps to wind-up trusts.
Anyone who is subject to the new reporting requirements who fails to file a T3 trust return can be subjected to a penalty in an amount equal to the greater of $2,500 and 5% of the highest fair market value of the assets of the trusts in the year.
Given the risk of potentially significant penalties, estate practitioners should be careful to remind clients who are acting as Trustees that tax advice needs to be obtained, regardless of whether trust assets are generating income.
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