The federal government is increasing filing requirements for trusts as part of an effort to counter tax avoidance, with penalties for those who don’t file a T3 return.
The change, which will come into effect in 2021, was announced Tuesday in the federal budget. “Some taxpayers have used trusts in complex arrangements to prevent the appropriate authorities from acquiring this required information,” the budget’s Tax Measures document says.
The new rules will require certain trusts to file an annual T3 return and provide additional information to help CRA “assess the tax liability for trusts and its beneficiaries.”
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Currently, trusts that don’t earn income or make distributions generally aren’t required to file annual T3 returns. Those that do file aren’t required to report the identities of all the beneficiaries. This creates “significant gaps” in the information about trusts, the document says.
The new annual filing rules will apply to express trusts, or those “created with the settlor’s express intent,” the document says.
Trusts will be required to report the identity of all trustees, beneficiaries and settlors. They will also have to report “the identity of each person who has the ability […] to exert control over trustee decisions regarding the appointment of income or capital of the trust,” it says.
The penalty for not filing a T3 will be $25 per day, with fines ranging from $100 at minimum and $2,500 at maximum. There will be additional penalties for taxpayers who knowingly don’t file or show gross negligence, equal to 5% of the maximum fair market value of property held in the trust during the relevant year.
The new requirements will begin for the 2021 taxation year.
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Bruce Ball, vice-president of taxation at CPA Canada, says the proposed rules would help the government understand who all the beneficiaries are for a trust.
“Speaking to someone from Finance this morning, they’re worried about changes in beneficial ownership and they don’t believe that they’re getting enough information on who actually beneficially owns the asset,” he says. “It will be a bit more work but, for the typical trust that people set up, it shouldn’t be a significant issue to deal with.”
Jamie Golombek, managing director for tax and estate planning at CIBC Financial Planning and Advice, says the change enhances CRA’s oversight of trusts.
“There’s going to be a lot more information now for the CRA to go after, especially in situations where the protector has the right to change or influence the trustee directing income and capital,” says Golombek.
The government is providing $79 million over a five-year period and $15 million on an ongoing basis to CRA to develop an electronic platform for processing T3 returns.
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There will be exceptions to the additional reporting requirements for the following types of trusts, the budget says:
- mutual fund trusts, segregated funds and master trusts;
- trusts governed 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);
- lawyers’ general trust accounts;
- graduated rate estates and qualified disability trusts;
- trusts that qualify as non-profit organizations or registered charities; and
- trusts that have existed for less than three months or that hold less than $50,000 in assets throughout the taxation year (provided, in the latter case, that their holdings are confined to deposits, government debt obligations and listed securities).