To combat tax avoidance, the federal government is increasing filing requirements for trusts, threatening penalties for those who fail to file a T3 return.
The change, which will come into force in 2021, was announced in the federal budget on Tuesday. “Some taxpayers used trusts in complex arrangements to prevent competent authorities from obtaining required information,” the tax measures document says.
The new rules will require some trusts to file an annual T3 return and provide additional information to help CRAs “assess the tax liability of the trusts and their beneficiaries.”
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Currently, trusts that do not earn income or make distributions are generally not required to file annual T3 returns. Those who do so are not required to report the identities of all beneficiaries. This creates “significant gaps” in information about trusts, the document states.
The new rules for submitting annual applications will apply to express trusts, i.e. “established in accordance with the express intention of the founder,” we read in the document.
Trusts will be required to report the identities of all trustees, beneficiaries and settlors. They will also have to report “the identity of any person who may (…) exercise control over the trustee’s decisions regarding the determination of the income or capital of the trust,” it says.
The penalty for failure to file a T3 will be $25 per day, and fines will range from a minimum of $100 to a maximum of $2,500. For taxpayers who knowingly fail to file or are grossly negligent, additional penalties will be imposed in the amount of 5% of the maximum fair market value of property held in the trust in a given year.
The new requirements will apply from the 2021 tax year.
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Bruce Ball, vice-president of tax at CPA Canada, says the proposed rules will help the government understand who all of the trust’s beneficiaries are.
“Speaking to someone in finance this morning, they expressed concerns about changes to beneficial ownership and they don’t believe they’re getting enough information about who actually owns the assets,” he says. “It will be a little more work, but for the typical trust that people build, it shouldn’t be a significant problem to solve.”
Jamie Golombek, managing director of tax and estate planning at CIBC Financial Planning and Advice, says the change improves CRA oversight of trusts.
“The CRA will now have much more information to review, especially in situations where the supervisor has the power to change or influence the fiduciary managing the earnings and capital,” Golombek says.
The government is providing the CRA with $79 million over five years and $15 million on an ongoing basis to develop the T3 electronic returns processing platform.
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The budget provides exceptions to the additional reporting requirements for the following types of trusts:
- mutual fund trusts, segregated funds and unit trusts;
- trusts managed by registered plans (i.e., deferred profit-sharing plans, pooled registered pension plans, RDSPs, RESPs, registered pension plans, RRIFs, RRSPs, registered supplementary unemployment benefit plans and TFSAs);
- attorney trust accounts;
- graduated rate estates and qualified disability trusts;
- trusts qualifying as not-for-profit organizations or registered charities; AND
- trusts that have been in existence for less than three months or that have assets of less than $50,000 for the entire taxable year (provided, in the latter case, that their assets are limited to deposits, government bonds and listed securities).
