Update: New trust reporting and disclosure requirements under the Income Tax Act
Note: this is an update to a previously posted Thought Leadership piece from November 2020 to reflect the delayed coming into force of these proposed changes, as well as additional information that has become available.
Richard Niedermayer, KC, TEP, Sarah Almon, TEP and Madeleine Coats
Governments around the world are taking steps to increase transparency at the expense of privacy. In Canada, federal government strategies to combat money laundering and tax evasion coming into effect in 2023 will have a significant impact on trusts and their historically “private” nature. Budget 2018 – Equality and Growth for a Strong Middle Class, announced on February 27, 2018, proposed that trusts with taxation years ending on or after December 31, 2021 will be subject to a series of requirements relating to reporting and disclosure. Thankfully, these proposed amendments have been delayed a further year, with the earliest possible implementation affecting trusts with a taxation year ending after December 30, 2023.
Specifically, these changes will require trustees to significantly increase the amount of information disclosed to Canada Revenue Agency, and to file a T3 Trust Income Tax and Information Return (“T3 Return”) for each year in existence going forward, whether or not income is earned within the trust. With the 2023 taxation year beginning in a short few weeks, we provide this reminder of the upcoming changes, and encourage trustees to contact their lawyer or tax preparer to discuss the impact on any existing trust arrangements that might be in place.
Disclosing this level of information may have significant impact on an estate plan – the information discussed below must be collected from all beneficiaries, as well as those individuals involved in the settlement, management, and administration of the trust. This may come as a surprise to persons involved with discretionary family trusts settled several years ago without much activity since settlement. The rules also apply to testamentary trusts, estates that are not graduated rate estates, and other types of inter vivos trusts.
If a trust is in existence on January 1, 2023, these new requirements must be met in 2024 when the T3 return is due (even if the trust is wound up on January 2, 2023). It is thus crucial that trustees consider the new rules, and determine whether action is required to mitigate the impact of these changes, in advance of that date.
New filing requirements
Trustees of trusts created during an estate freeze, or designed to hold specific property, may have never filed T3 Returns if the trust has not earned any income since its settlement. After 2023, express trusts resident in Canada and non-resident trusts will be required to file a T3 return, regardless of whether income is earned. Of particular importance, the Canada Revenue Agency has indicated that these new rules will extend to bare trusts, despite the fact that bare trusts are not considered as taxable trusts from a tax law perspective. Once implemented, this will require the trustees of bare trusts to file a T3 information return, for every year the trust exists, although bare trusts are still not separate taxpayers for income tax purposes.
As a result, these new regulations may extend to the following types of relationships, in addition to the more traditional trust relationships:
- Express bare trusts created for estate planning purposes;
- Nominee arrangements for real estate transactions;
- Joint tenancies between parent and child, where there are indications of a bare trust relationship;
- A General Partner holding property in trust for a Limited Partner; or
- Drop-down transactions for capital gains planning whereby the parent company becomes a bare trust nominee for the subsidiary where no legal transfer of ownership of the “dropped” assets has been effected.
New information disclosure requirements
For trusts in existence during any part of the 2023 taxation year, information must be collected on the following persons:
- trustee(s) of the trust;
- beneficiary(ies) (including contingent beneficiaries, or corporations or trusts which are current or potential beneficiaries);
- the settlor of, or any other contributor to, the trust; and
- any person able to exert control or influence over a trustee’s decisions (i.e. a protector, and potentially an advisory board or the author of a letter of wishes).
That information for each person includes:
- legal name;
- date of birth (for individuals);
- jurisdiction of residence; and
- tax identification number (Canadian or foreign).
Trustees will need to work with their tax preparers to collect, store, and manage this information in order to facilitate tax filing in 2024. This information will have to be filed as a schedule to the T3 Return filed in 2024 for the 2023 taxation year, and not separately.
Consequences of failing to meet requirements
If the trustees of a trust that is required to file a T3 Return for 2023 (or any year thereafter) fail to do so, or fail to provide the additional information needed by these new requirements, they will be subject to a penalty. The penalty will be equal to $25 per day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500.
If the failure was made knowingly, or due to gross negligence, a penalty of 5% of the maximum value of the property held during the relevant tax year by the trust will be applied. This additional penalty will be a minimum of $2,500, and will be in addition to existing penalties with respect to T3 Returns. This could be very significant if the trust holds valuable assets.
As an example, if your cottage property or common shares of your private company are held in a trust and are worth $500,000, the penalty for knowingly failing to remit a T3 Return, or submit all of the information required for all involved individuals, would be $25,000 (over and above any other penalties which may also apply to that trust).
Exclusions from new requirements
The following types of trusts will not be subject to the updated requirements:
- mutual fund trusts, segregated funds and master trusts;
- trusts governed by registered plans (i.e., deferred profit sharing plans; pooled registered pension plans; registered disability savings plans; registered education savings plans; registered pension plans; registered retirement income funds; registered retirement savings plans; registered supplementary unemployment benefit plans; and tax free savings accounts);
- lawyers’ general trust accounts (but not client-specific trust accounts);
- graduated rate estates and qualified disability trusts;
- trusts that qualify as 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 throughout the taxation year, if the holdings are limited to bank deposits, government debt obligations, or listed securities only.
Do you have an existing trust which no longer serves a purpose?
If you are the trustee of a trust which no longer serves a purpose within your or someone else’s estate plan, or is sitting empty, we recommend contacting our Estates & Trusts group to discuss next steps. We may be able to effect wind-ups of trusts no longer serving a purpose, to avoid having to file under these new regulations for 2023. Examples of a trust “no longer serving a purpose” include trusts holding property no longer qualifying for the principal residence exemption, trusts created for income splitting with a spouse or others prior to the expansion of the tax on split income rules, or testamentary trusts no longer receiving graduated rates. If any of these circumstances apply, or you have questions about specific trusts within an estate plan, please contact us for advice. These trusts would have to be wound up on or before December 31, 2022 in order to avoid application of the new rules for 2023.
It will be important for trustees to collaborate with their tax preparers and legal counsel to ensure they do not run into challenges with respect to these trusts during the 2023 taxation year. In particular, trustees should reach out to their tax preparers to determine how the new information will be collected over the coming months.
For those considering incorporating trust structures into their estate plan, these changes add a layer of complexity, depending on the circumstances. For many, these changes may not be of great consequence, particularly for those who envision a small group of related beneficiaries from whom collecting this information will not pose a great challenge. The benefit of knowing these rules prior to settling a trust is being able to collect this information at the outset, as opposed to seeking out settlors from years ago to retrieve their social insurance number.
Until the regulations are finalized, it is unclear how these rules will apply to disclosing information about settlors who are deceased, or classes of beneficiaries not yet in existence. We encourage you to check our website for further updates.
This update is intended for general information only. If you have further questions about these programs or are an employer seeking to support your workers, please contact a member of our Estates & Trusts group.
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