New trust reporting requirements
The Canadian government has recently announced new trust reporting requirements that will take effect for trusts with taxation years ending on or after December 31, 2023. These changes represent a significant shift in the reporting obligations for most trusts and could potentially affect a wide range of taxpayers and their advisors. In this blog post, we will provide a comprehensive overview of the new requirements and what you need to know to get ready for them.
1. Trust Reporting Obligations Under the current rules, a trust must file a T3 Trust Income Tax and Information Return (T3 Return) if it has taxes payable, disposes of capital property, or distributes income or capital to its beneficiaries. However, under the new rules, most trusts will be required to file a T3 Return every year, even if there are no taxes payable, no disposition of capital property, or no distribution of income or capital.
2. Additional Information Required in T3 Return In addition to the current reporting requirements, trusts will now be required to provide additional information in their T3 Return. This information includes the name, address, date of birth, jurisdiction of residence, and taxpayer identification number (TIN) for trustees, beneficiaries, settlors, and anyone who has the ability to exert influence over a trustee decision regarding the appointment of income or capital.
3. Bare Trusts Under the new rules, bare trusts will also be required to file a T3 Return each year. This is a significant change from the current requirements, which may affect many taxpayers who are involved in bare trust arrangements.
4. Penalties for Non-Compliance Failure to comply with the new trust reporting obligations may result in gross negligence penalties of up to 5% of the highest total fair market value of all the property held by the trust in the year. This is a significant amount and serves as a strong reminder of the importance of complying with the new requirements.
5. Definition of "Settlor" It's important to note that the definition of a “settlor” for purposes of these new trust reporting rules is found in subsection 17(15) of the Income Tax Act (Canada). A settlor is deemed to be any person or partnership that has made a loan or transfer of property, either directly or indirectly, to or for the benefit of the trust. However, a person or partnership that deals at arm's length with the trust will not be considered a “settlor” if it:
*Makes a loan to the trust at a reasonable rate of interest; or Makes a transfer to the trust for fair market value consideration.
6. Exemptions from Filing T3s There are certain trusts that are exempt from filing T3s, including:
- 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 CA$50,000 throughout the year, where certain kinds of assets are held, such as cash or shares listed on a designated stock exchange;
- Lawyer's general trust account (but not specific client accounts);
- Trusts that qualify as non-profit organizations or registered charities;
- Mutual fund trusts, segregated funds, and master trusts;
- A trust, all of the units of which are listed on a designated stock exchange;
- Graduated rate estates;
- Qualified disability trusts;
- Employee life and health trusts;
- Certain government-funded trusts; and
- 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, registered retirement savings plan, employee