New Canadian trust reporting and disclosure rules will come into effect in 2021. In brief, the new rules will impose a filing obligation on certain trusts which currently do not have a filing requirement. They apply to non-resident trusts that currently have to file a T3 return and certain trusts that are resident in Canada. Such trusts will be required to report the identity of all trustees, beneficiaries and settlors of the trust, as well as anyone with the ability to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g., a protector).
The new rules were introduced in the 2018 federal budget with the aim to improve the collection of beneficial ownership information in relation to trusts and to help the Canada Revenue Agency assess the tax liability for trusts and its beneficiaries.
Currently, a trust generally is required to file an annual income tax return – T3 Trust Income Tax and Information Return (“T3 return”) – if the trust has tax payable or distributed any of its income or capital to its beneficiaries. A trust that has no activity during the year and no tax payable generally is not required to file a T3 return.
The New Rules
Starting from the 2021 taxation year, the new rules will require non-resident trusts that currently are required to file a T3 return and certain express trusts (generally a trust created with the settlor’s express intent) that are resident in Canada, to file a T3 return to provide additional information, including the name, address, date of birth (for individuals), jurisdiction of residence and taxpayer identification number (TIN) of the following:
- the settlor of the trust;
- each of the trustees;
- each of the beneficiaries; and
- anyone with the ability to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g., a protector).
The required information is required to be filed as a new schedule along with the T3 return. It cannot be filed on its own.
The following trusts may be exempt from the new disclosure obligations:
- mutual fund trusts, segregated funds and master trusts;
- trusts governed by registered plans (e.g., registered pension plans, registered retirement savings plans, tax free savings accounts, etc.);
- lawyers’ general 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 CAD 50,000 in assets (limited to deposits, government debt obligations and listed securities) throughout the taxation year.
Failure to file the T3 return including the new schedule could result in penalty of CAD 25 per day of delinquency (with a minimum penalty of CAD 100 and maximum penalty of CAD 2,500). If such failure is made knowingly, or if there is gross negligence, an additional penalty of 5% of the maximum fair market value of the trust’s assets (with a minimum penalty of CAD 2,500) could be imposed. Existing penalties in relation to the T3 return will continue to apply.
As a result of the new trust reporting and disclosure rules, trusts that had no reporting and disclosure obligations on the basis that they had no tax payable and no activity during the year will soon be caught under the new rules and required to file a T3 return. Trustees should be prepared for the new rules with a full understanding of the scope and reporting obligations. These new additional reporting requirements should also be taken into account in determining whether and how a new trust should be set up as well as any variation of an existing trust from a Canadian perspective. Finally, the penalty of 5% of the value of the trust’s assets for deliberate failure or grossly negligent failure to disclose is significant. Trustees would be well advised to take appropriate steps to ensure that this penalty does not apply to any trusts under their administration.