Proposed requirements for disclosure of trust and estate beneficiary information

Current filing requirements for trusts

Under the current rules, a trust (including a deemed resident trust) is generally only required to file an annual trust income tax and information return (a “T3 return”) if it has taxes payable or it made distributions (whether on account of capital or income) to any of its beneficiaries.

In other words, a trust that is inactive, such as one that only holds shares of a private company that did not pay any dividends and that made no distributions to its beneficiaries, would generally not need to file a T3 return.

For certain trusts with taxation years ending on or after December 31, 2021, the rules are changing such that the non-filing exemptions may no longer apply.

Proposed New Filing Requirements for Trusts

Budget 2018 proposed significant amendments to income tax rules relating to trusts. These amendments would allow the Canada Revenue Agency (CRA) to collect additional beneficial ownership information with respect to trusts and to more accurately assess the tax liabilities of trusts and beneficiaries.

Annual T3 return filing

Under the proposed amendments, all express trusts that are resident in Canada, and non-resident trusts that are currently required to file a T3 return, would be required to file a tax return, subject to certain exceptions described below.

An “express trust” generally means a trust created intentionally by a settlor (usually made in writing).

Under the proposed rules, a trust with no income to report would be required to file a T3 return unless it fits into one of the exceptions.

Additional disclosures

The second aspect of the proposed amendments would require disclosure of the identity of the following persons on an annual basis:

  • the trustee(s);
  • the beneficiaries;
  • the settlor of the trust, and
  • any person who has the ability (through the terms or a related agreement) to exert control over decisions of the trustee(s) regarding the appointment of income or capital of the trust (i.e. a protector).

Such disclosure would be made on a yet to be released new schedule within the T3 return:

  • name;
  • address;
  • date of birth (for individuals);
  • jurisdiction of residence; and
  • the person’s identification number (e.g. social insurance number [“SIN”], corporation business number, or account number issued to a trust by CRA).

The additional disclosures would apply even if the above persons were a trustee or beneficiary for only a single day in the year. The new schedule must be attached to the trust’s T3 return and cannot be filed on its own.

Currently only a limited amount of this kind of information was disclosed when distributions were made to beneficiaries.

Exceptions to the T3 filing and the additional disclosure requirements

There would be exceptions to the proposed T3 filing requirements and additional disclosure requirements.

Non-express trusts (including graduated rate estates) are excluded from the proposed rules. Certain express trusts are also excluded from the proposed rules. Examples include express trusts that:

  1. have been in existence for less than three months at the end of the year;
  2. hold only certain assets (i.e. cash, debt obligations, listed securities and few other types of assets) with a total fair market value that does not exceed $ 50,000 throughout the year;
  3. are mutual fund trusts, segregated funds and master trusts;
  4. are governed by registered plans such as RRSPs, TFSAs, and RESPs;
  5. are qualified disability trusts;
  6. are lawyers’ general trust accounts; or
  7. qualify as non-profit organizations or registered charities.

It appears that express trusts otherwise meeting the second exception above, but that were settled with a gold coin instead of a $10 bill, for example, would not meet the second exception criteria.

Additional penalties

New penalties were also proposed in Budget 2018. Failure to file a T3 return, including the additional disclosure requirements, may result in a $25 per day penalty (with a minimum penalty of $100) up to a maximum of $ 2,500. If a failure to file the return was made knowingly, or due to gross negligence, an additional penalty equal to 5% of the maximum value of property held during the year by the trust may apply with a minimum penalty of $2,500.

The existing penalties for T3 returns will also continue to apply.

Application of proposed amendments

The proposed amendments will, if enacted as proposed, apply to taxation years ending after December 30, 2021 and onwards.

What’s next?

The earliest time for most trusts to file a T3 return under the proposed disclosure requirements will be for the 2021 tax year (with a filing date in 2022). However, several matters should be given consideration now:

  • Trustees should consider how they can collect the information required. Copies of trust indentures and amendments or addendums may need to be located if not readily available; the current address and SIN of each beneficiary may need to be obtained from each beneficiary. In some cases, beneficiaries will only be made aware of their interest in the trust because of the need to ask for their SIN or address to comply; it may be necessary to develop a communication strategy in these cases.
  • For trustees and beneficiaries who do not want their information reported to CRA in connection with the trust, it may be possible to remove them from the trust prior to December 31, 2020 to avoid disclosure by the trust or estate under the proposed rules.
  • For trusts that no longer serve any important purpose, consideration should be given to winding them up prior to December 31, 2020.