On of February 27th, 2018, the Department of Finance released the 2018 Federal Budget which outlined that new trust reporting requirements would be set in place to assist the CRA in their collection of information and ensuring that trusts are paying their taxes appropriately.
With multiple changes happening and exceptions allotted for this new requirement, it can create confusion. Accountants that specialize in tax services are able to assist with these new changes, ensuring that documents that need additional information will be completed.
Keep reading to learn about the effects of these new reporting requirements:
Affected Trusts
The new reporting requirements are applicable to all express trusts resident (arises from the explicit instructions of the settlor) in Canada and non-resident trusts (imposed by courts) that file T3 returns.
Express trusts can include living trusts, testamentary trusts, discretionary trusts and fixed trusts, whereas non-express trusts are constructive trusts and resulting trusts, which do not have to follow the new requirements.
Of the express trusts listed above, the following are exempt from the new reporting requirements:
- Mutual fund trusts, segregated funds, and master trusts;
- Trusts governed by registered plans;
- Lawyers’ mixed trust accounts;
- Graduated rate estates and qualified disability trusts;
- Trusts that qualify as non-profit organizations or registered charities; and
- Trusts that have been in existence for less than three months or that hold less than $50,000 in assets throughout the taxation year (the $50,000 asset exemption only applies where the holdings are confined to deposits, government debt obligations and listed securities)
Effect of the New Reporting Requirements
The new reporting requirements will provide more information and data for the CRA, which will confirm that trusts and associated corporations are paying the appropriate taxes. These new rules will come into effect in the 2021 taxation year to ensure that those who are affected are prepared to comply with these rules.
Trusts that fall under the new reporting requirements will have to file annual T3 returns and provide additional information such as the identity of all trustees, beneficiaries, and settlors of the trust and the identities of those that have the ability to exert control over the trustee decisions regarding appointment of income and/or capital of the trust (also known as the ‘protector’).
In addition to the required documents, there will also be penalties for trusts that fail to file a T3 return and where a T3 is filed without the required beneficial ownership schedule. Similar to the penalties for failing to file a T1135 information return, the standard penalty will be $25 each day after the deadline with a minimum penalty of $100 and a maximum penalty of $2,500.
If the failure to file the T3 return is made knowingly, there will be an additional penalty that is equivalent to 5% of the maximum fair market value of the property, with a minimum penalty of $2,500. Additionally gross negligence penalties if applied would be at a rate of 5% of the fair market value of the trust’s assets for each year (with a minimum $2,500 gross negligence penalty if applicable).
There may be more changes to come between now and 2021.
