Are you a settlor, trustee, beneficiary or protector of a Canadian trust?
If so, you need to be aware of changes to the Income Tax Act that have the following important requirements, expected to be put into effect for the current fiscal year:
1. More Trusts to File T3 Trust Income Tax Returns – Many trusts that were previously exempt from filing T3 income tax returns must now file these returns; and
2. Additional Disclosures in T3 Trust Income Tax Returns – Many trusts are now required to make substantial additional disclosures when filing the T3 income tax returns.
These new disclosures are of particular concern since many trustees will now be required to collect and disclose personal information of the settlors, trustees, beneficiaries and protectors of the trust.
Some particular details are referred to below.
More Trusts to File T3 Income Tax Returns
Many trustees have relied on a provision in the Income Tax Act to exempt them from filing T3 trust income tax returns. This exemption was generally available where the trust had no tax payable for the year and did not dispose of any capital property during the year.
However, now, virtually every “express trust” that is resident in Canada will be required to file a T3 income tax return, unless the trust meets one of the following conditions:
· The trust has been in existence for less than three months at the end of the year.
· The trust holds assets with a total fair market value of $50,000 or less throughout the year and the only assets held by the trust throughout the year were:
o Cash;
o certain debt obligations;
o shares, debt obligations or rights listed on a designated stock exchange;
o shares of a mutual fund corporation;
o units of a mutual fund trust; or
o interests in a related segregated fund.
· The trust is required under certain rules of professional conduct or Canadian/provincial law to hold funds for the purposes of a regulated activity and the trust is not maintained as a separate trust for a particular client or clients.
· The trust is a registered charity, a club, society or association.
· The trust is a mutual fund trust, a related segregated fund trust or is prescribed as a master trust.
· The trust is a graduated rate estate.
· The trust is a “qualified disability trust”.
· The trust is an employee life and health trust.
· The trust is a special kind of trust, such as government funded trusts, established under settlement agreements.
· The trust is under or governed by a DPSP, pooled RPP, RDSP, RESP, RPP, RRIF, RRSP or TFSA.
· The trust is a cemetery care trust or a trust governed by an eligible funeral arrangement.
Additional Personal Disclosures Required in T3 Income Tax Returns
Importantly, all trusts that are required to file a T3 return for the year will be obliged to make the following Additional Disclosures in their returns:
· The name, address, date of birth, jurisdiction of residence and taxpayer identification number (“TIN”) for each person who, in the year:
o is a trustee of the trust;
o is a beneficiary of the trust (whose identities are known or ascertainable with reasonable effort by the person making the return at the time of filing the return);
o is a settlor of the trust; or
o is a person who has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust (i.e., a “protector” of the trust).
Penalties
If there is a failure (a) to file a T3 Return or (b) to file the required personal disclosures, the penalties are:
o $25 a day for each day of delinquency – minimum: $100/maximum: $2,500.
If the failure to file is knowingly, or due to gross negligence, there is an additional penalty equal to 5% of the maximum value of the property held by the trust during the relevant year (not its income), with a minimum of $2,500.
Penalties with respect to the T3 Return that existed prior to these changes continue to apply.
These penalties will be very punitive.