The 2018 Federal Budget proposed new trust reporting and disclosure requirements in an attempt to improve the collection of beneficial ownership information and to help Canada Revenue Agency assess the potential tax liabilities for trusts and their beneficiaries.

These proposed changes to the legislation and CRA’s administrative practice will impose a filing requirement for most trusts that were previously exempt from filing a T3 Trust and Income Tax return. The new measures were intended to be in place for trust taxation years ending on or after December 31, 2021

On January 14, 2022, CRA announced that since the legislation to support these proposed measures has not yet received Royal Assent, CRA will continue to administer the existing rules for trusts, under enacted legislation, and the proposed beneficial ownership reporting requirements will not be part of the 2021 T3 income tax return.

In addition, as per the 2021 T4013 T3 Trust Guide, it appears that CRA’s administrative practice to exempt filing for inactive trusts is also still applicable. Generally, under these provisions, a T3 return is not required where the trust did not:

• Have tax payable;

• Have a taxable capital gain or dispose of a capital property;

• Provide a benefit of more than $100 to a beneficiary for upkeep, maintenance or taxes for property maintained for the beneficiary’s use; or

• Allocate any income, gain or profit to one or more beneficiaries.

Some examples of trusts that are not currently obligated to file a T3 return, but will be subject to the new requirements once the legislation is enacted are as follows:

• Family trusts that hold personal-use property (i.e.: cottage, Florida vacation home); and

• Trusts holding shares of a private company, which have not reported prior dividends or capital gains.

Note that there are some exceptions to the new requirements including (but not limited to) graduated rate estates and qualified disability trusts.

Review of Proposed New Reporting and Disclosure Requirements

As discussed, once the proposed legislation has received Royal Assent, most inactive trusts will have to file a T3 return and will be subject to new increased disclosure requirements.

The new requirements will necessitate the disclosure of additional personal information with respect to various persons associated with a trust.

For example, the following details with respect to each and every settlor, trustee, beneficiary, or any person that can exert influence over trustee decisions will need to be disclosed:

• Name;

• Address;

• Date of birth (individuals);

• Jurisdiction of residence; and

• Taxpayer identification number (i.e.: social insurance number, business number)

Trusts that fail to comply with the new reporting requirements and/or mandatory information disclosures may be subject to punitive penalties.

In addition to the standard failure to file penalties, new penalties have been introduced that may apply in circumstances where it is determined that a false statement or omission has been made knowingly, or in circumstances of gross negligence. These penalties range from a minimum of $2,500 to 5% of the highest fair market value of all properties held by the trust in the year.

Recommended Course of Action

Although the proposed legislation for the changes described will not be implemented for taxation years ending on December 31, 2021, it is anticipated that it will receive Royal Assent in the near future. Accordingly, it is important that the gathering of the required information begin as soon as possible.

We also recommend a review of current structures to determine whether trusts continue to serve a relevant purpose, and consider winding-up any inactive trusts that are no longer required. In addition, to avoid continued unnecessary disclosure of information to CRA, consider removing and/or changing extraneous trustees or beneficiaries. (Important Note: the trust deed should be reviewed to ascertain any potential negative tax consequences related to a change in trustees or beneficiaries).

For further guidance on the impact of these new trust reporting and disclosure requirements on your current structure, please contact your Shimmerman Penn advisor.