Tax Insights: Navigating the proposed trust reporting rules ─ Trustees need to be prepared

November 10, 2022

Issue 2021-27R

This Tax Insights has been superseded by our Tax Insights "New trust filing and information reporting rules are now enacted: Trustees need to be prepared," which was released on February 13, 2023.

November 10, 2022 update: On November 4, 2022, federal Bill C-32, Fall Economic Statement Implementation Act, 2022, was tabled for first reading in the House of Commons. Bill C-32 implements the 2018 federal budget proposal that introduces new tax return filing and information reporting requirements for trusts (as discussed in our November 1, 2021 Tax Insights below, but modified by several iterations of draft legislative proposals released subsequently).

Bill C-32 extends the application date of the rules to taxation years that end after December 30, 2023. This one‑year extension gives trustees more time to gather the information required to meet the new reporting requirements. Trustees should also use this time to consider and wind-up inactive trusts (including bare trust arrangements) before the end of 2022; trusts and bare trust arrangements that are wound up before the end of 2022 will not be subject to the new rules.

As mentioned in our February 17, 2022 update, draft legislative proposals on the enhanced trust reporting rules were released by the Department of Finance on February 4, 2022. Although the February 4, 2022 draft legislative proposals were generally similar to the original proposed additional trust reporting rules, the new proposals expanded the application of these rules to a “bare trust” arrangement — an arrangement where a trust can reasonably be considered to act as an agent for its beneficiaries with respect to all dealings in all of the trust’s property. Other changes to the rules as originally proposed, included:

extending the application date of the rules to taxation years that end after December 30, 2022 (which has been further extended by one year by Bill C-32, as discussed above)
exempting a trust, all the units of which are listed on a designated stock exchange, from these additional reporting rules
exempting the disclosure of information that is subject to solicitor-client privilege

The remainder of this Tax Insights was published on November 1, 2021. It has not been altered to reflect Bill C‑32 or draft legislative proposals released after November 1, 2021. A new Tax Insights on the final additional trust reporting rules will be released after Bill C‑32 receives royal assent.

In brief

The 2018 federal budget proposed new tax return filing and information reporting requirements for trusts that will come into effect for taxation years that end after December 30, 2021. The budget also proposed penalties for non-compliance with these new rules. The proposed trust reporting rules will:

create a T3 “Trust Income Tax and Information Return” filing obligation for certain trusts that do not currently have a filing requirement
require a trust to report the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector)
apply to certain trusts resident in Canada and non-resident trusts that are currently required to file a T3 return

While the rules have not yet come into force, the expectation is that they will apply to taxation years ending after December 30, 2021. The new rules, once enacted, will require trustees to gather and report significantly more information, so trustees need to be prepared to meet these requirements; the filing deadline is March 31, 2022, for a trust with a December 31, 2021 taxation year end.

This Tax Insights provides details on the proposed changes and next steps for trustees to consider.

In detail

New filing requirement

The proposed reporting rules are meant to improve the collection of beneficial ownership information with respect to trusts, to allow the Canada Revenue Agency (CRA) to assess the tax liability, if any, for trusts and their beneficiaries. The current income tax legislation and the CRA’s current administrative position exempt certain trusts from a T3 “Trust Income Tax and Information Return” filing obligation.

Generally, a trust that has no activity during the year and no income tax payable is not required to file a T3 return. However, based on the proposed legislation, starting with trust taxation years that end after December 30, 2021, these exemptions will no longer apply for certain Canadian-resident and non‑resident trusts.

For many trusts, such as those created on an estate freeze or holding a vacation property, the trustees may never have filed a T3 return. The 2021 taxation year (which has a March 31, 2022 filing deadline), might be the first one for which these trusts have a filing requirement. Whether a trust is required to file a trust return under the current or proposed rules, trustees will be required, under the proposed new rules, to collect and disclose additional information (see below). These new proposed filing requirements are onerous, so trustees should plan ahead of the deadline and gather all the necessary information.

New information reporting requirement

For taxation years that end after December 30, 2021, the proposed new reporting rules will require an “express trust” (generally a trust created by a settlor during his or her lifetime or at death in a will) and a non‑resident trust that is currently required to file a T3 return, to report with its T3 return, the name, address, date of birth (in the case of an individual), jurisdiction of residence and taxpayer identification number (TIN) for each:

settlor (this definition is very broad, as discussed below)
trustee
beneficiary, and
person who has the ability to exert influence over trustee decisions regarding appointment of income or capital of the trust (e.g. a protector) in the year

A TIN includes a social insurance number, a business number, an account number issued to a trust and, for a jurisdiction other than Canada, a TIN used in that jurisdiction to identify an individual or entity.

This new information schedule must be filed with the trust’s T3 return — it cannot be filed on its own.

Definition of “settlor”

For the purposes of the new information reporting, the term “settlor” is defined in subsection 17(15) of the Income Tax Act (Canada) (ITA). The “settlor” is a person or partnership who has loaned property or transferred property, directly or indirectly in any matter whatever, to a trust for the benefit of the trust at or before the taxation year end, but excludes:

loans made at a reasonable rate of interest, and
transfers made for fair market value (FMV) consideration,

by a person or partnership dealing at arm’s length at the transaction time.

For example, if a loan is made at a low interest rate, or a transfer is made for consideration that is less than FMV, to a trust or to an entity in which the trust has an interest (i.e. not dealing at arm’s length), the person or partnership that makes the loan or transfer would be considered a settlor under this definition.

As this definition is very broad, to help identify potential settlor(s), trustees may want to start reviewing all historical transactions since the trust settlement date (in the event the legislation is enacted as drafted).

Exceptions to the new rules

The following trusts may continue to be exempt from filing T3 returns and the proposed new additional information disclosures if certain conditions are met (i.e. no income tax payable, no taxable capital gains and no dispositions of capital property in the year):

trusts that have been in existence for less than three months
trusts that hold assets with a maximum of $50,000 in FMV throughout the year (these assets are limited to deposits, government debt obligations and listed securities)
lawyers’ general trust accounts
trusts that qualify as non-profit organizations or registered charities
mutual fund trusts, segregated funds and master trusts
graduated rate estates
qualified disability trusts
employee life and health trusts
certain government funded trusts
trusts governed by registered plans (including registered retirement savings plans and tax-free savings accounts), and
cemetery care trusts and trusts governed by eligible funeral arrangements

Penalties for non-compliance

Penalties for failure to file the T3 return, including the new information schedule, will be $25 per day (minimum $100) up to a maximum penalty of $2,500. Gross negligence penalties of 5% of the maximum FMV of property held in the trust in the year (minimum penalty of $2,500) may also apply.

Other considerations — Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS)

While these trust disclosure requirements may be new to some, similar disclosures had already been implemented under FATCA and CRS (Parts XVIII and XIX of the ITA, respectively). Because many Canadian financial institutions have adopted combined FATCA and CRS certifications to collect information on their account holders to satisfy both FATCA and CRS, it is likely that a trust involving non-Canadian persons has already been asked to complete a certification related to a bank account, brokerage account or other investment relationship, and that some of the information has been provided to the CRA (i.e. under FATCA and CRS, the financial institutions provide controlling person information to the CRA only when the controlling persons identified by the trust are US persons or other non-Canadian persons). As a result, trustees should ensure that their disclosures under the new trust reporting rules are consistent with those made under FATCA or CRS. In anticipation of these new rules, trustees should review their submissions to various authorities for discrepancies.

The takeaway

While these proposed trust rules have not yet come into force, the general expectation is that they will become effective for taxation years that end after December 30, 2021. The new rules will place a heavier burden on trustees to gather and report information on or before the March 31, 2022 filing deadline. In many cases, it may take additional time to gather the information from various parties, particularly in cases where a trust has not filed a return in the past. It may be advisable to consider dissolving some dormant trusts to minimize future compliance obligations and mitigate exposure to the new penalties. Trustees should understand these reporting obligations and proactively review trust documents to identify relevant parties and gather information where it is not readily available. Trustees should also consider applying for a trust account number as soon as possible, preferably by the end of 2021, to have the flexibility to e-file the trust return and the required information. We expect that the CRA will release additional guidance to help trustees comply with these new rules.