NEW TRUSTS REPORTING RULE on and after Dec 30, 2022 (Extended to Dec 30, 2023)

The new regime will require most trusts to file a T3 Trust Income Tax and Information Return annually for tax years ending on or after December 31, 2022, including trusts that have never filed before. In addition, all affected trusts will be subject to enhanced.

These rules were originally proposed to begin to apply for 2021 T3 returns, but implementation was deferred for one year. Similar rules also apply for Quebec purposes.

CURRENT TAX RULES FOR TRUSTS

Under current rules, a trust must generally file a T3 return for a tax year if the trust:

has tax to pay for the year

disposes of a capital property, or

distributes all or part of its income or capital to its beneficiaries

The return must be filed within 90 days after the end of the trust’s tax year. No T3return is currently required from trusts that are inactive or have no income or taxpayable. In addition, trusts that are required to file a T3 return do not have to identifyall of the trust’s beneficiaries. The Canada Revenue Agency (CRA)’s T3 guide sets outthe current requirements in more detail.

NEW TAX RULES FOR TRUSTS

Application

For taxation years ending after December 30, 2022 (basically 2022 and later taxyears), the new reporting requirements would apply to “express trusts” that areresident in Canada and to non-resident trusts that are currently required to file a T3return. An express trust is generally a trust created with the settlor's express intent,usually made in writing. In addition, as part of the February 4, 2022 draft legislation,subsection 150(1.3) of the Income Tax Act was proposed, which will subject so-calledbare trust arrangements to the new reporting rules. This rule is also included in theAugust 9, 2022 draft legislation. 

Some types of trusts are exempt from the proposals, including:

trusts that have existed for less than three months

trusts that hold less than $50,000 in assets throughout the tax year (as long as theyonly hold deposits, government debt obligations and listed securities)

mutual fund trusts, segregated funds and master trusts

trusts where all the units of which are listed on a designated stock exchange

trusts governed by registered plans, including proposed first home savingsaccounts

employer profit sharing plans

lawyers’ general trust accounts

graduated rate estates and qualified disability trusts

trusts that qualify as non-profit organizations or registered charities

employee life and health trusts

certain government-funded trusts

cemetery care trusts and trusts governed by eligible funeral arrangements

It should also be noted that a specific rule has been added to ensure that information that is subject to solicitor-client privilege does not have to be disclosed

Expanded reporting requirements

Trusts that fall under the new rules would have to file a trust return and reportadditional information regarding all “reportable entities,” which include all the trust’strustees, beneficiaries and settlors, as well as any person who has the ability (throughthe trust terms or a related agreement) to exert control or override trustee decisionson the appointment of the trust’s income or capital (e.g., a protector). Reportableentities can be individuals, trusts, corporations or other entities, and they includeentities that qualified as reportable for only part of the year.

The additional information to be reported (on T3 Schedule 15, “Beneficial ownershipinformation of a trust”) for each reportable entity includes:

name

type and classification of entity

address

date of birth (if a natural person)

country of residence

taxpayer identification number, such as social insurance number, trust accountnumber, business number or taxpayer identification number used in a foreignjurisdiction

Under these rules, beneficiaries include persons who currently have a right to incomeor capital as well as those having residual or contingent interests. As a result, somebeneficiaries might not know that they have an interest in the trust, which couldcause issues when collecting information from them.

A trust would be considered to have met the reporting requirements if it provides thisinformation for each trust beneficiary whose identity is known or ascertainable, withreasonable effort at the time of filing. For beneficiaries whose identities are notknown or ascertainable, a trust can comply by supplying sufficiently detailedinformation on the T3 return to determine with certainty whether any particularperson is a beneficiary.

When identifying the settlors, keep in mind that the proposed rules use the definition in subsection 17(15) of the Income Tax Act, which includes both the legal settlor and any persons who transfer property to the trust (except commercial loans and transfers for value by an arm’s length person)

https://www.cpacanada.ca/en/business-and-accounting-resources/taxation/blog/2022/october/new-rules-for-trust-reporting-are-coming?sc_camp=3AE73D60DD5B48… 5/8 

All this information must be collected for the first year of filing (2022) and reported tothe CRA. For following years, we understand that trusts will only need to reportmodifications to this information, such as a name change and a person becoming orceasing to be a reportable entity. Although this will ease the process in future years, asignificant amount of work may be needed for the first filing.

Penalties

The current penalty for not filing a T3 return when required will continue to apply. Itwill also apply if the required additional information on Schedule 15 is not includedwith the return. The penalty is $25 for each day late, with a minimum penalty of $100and a maximum of $2,500.

The new rules also impose a significant additional gross negligence penalty where afailure to file the return was made knowingly or due to gross negligence. Theadditional penalty would be five per cent of the maximum value of property held bythe trust during the relevant year, with a minimum penalty of $2,500. This penaltywould also apply to false statements and omissions amounting to gross negligence aswell as a failure to respond to a CRA demand to file.

August 9, 2022 

(https://www.canada.ca/en/department-finance/news/2022/08/government-delivering-on-budget-2022-commitments-to-canadians.html