On January 14, 2022, the Canada Revenue Agency (the “CRA”) announced the postponement of the new federal trust reporting regime that was set to come into effect for the taxation year ending on December 30, 2021. This news likely comes as a relief to many trustees who were grappling with the onerous new filing and disclosure requirements ahead of the upcoming T3 filing deadline for trusts with a December 2021 year-end. With this announcement, trustees can now safely file their 2021 T3 tax returns in accordance with the current rules and without any additional reporting obligations.
However, this deferral should not be taken as a warrant to become complacent.
While the CRA’s recent announcement does not specify a new effective date for the additional reporting rules, the new requirements could apply as early as 2023 for tax filings respecting the 2022 taxation year. Given the complexity of the new rules and the serious penalties associated with improper or inadequate disclosure, trustees should make the most of the extra time they have to prepare for the coming into force of the new reporting regime.
This article, while not an exhaustive overview of the new requirements, is intended to remind trustees of their impending obligations and highlight some areas of potential concern that trustees should turn their minds to now, notwithstanding the postponed application of the new rules.
Overview of the New Trust Reporting Rules
In its 2018 annual budget, the Federal Government announced new reporting requirements for trusts as part of its larger efforts to combat tax evasion, money laundering, and other financial crimes. Those requirements were later incorporated into a set of draft amendments to the Income Tax Act (the “ITA”) and Income Tax Regulations (the “ITR”) released on July 27, 2018.
The new requirements with respect to trust reporting are two-fold:
- amendments to section 150 of the ITA create a requirement to file a T3 “Trust Income Tax and Information Return” for certain trusts that were previously exempt from the T3 filing obligations; and
- the new section 204.2 of the ITR requires most trusts to disclose identifying information about certain persons connected with the trust.
Amendments to the penalty provisions of the ITA also introduce significant penalties for trusts that fail to comply with the new rules.
Application of the New Trust Reporting Rules
The new requirements will apply to all resident and deemed resident “express trusts” (i.e. trusts created by the express consent of the settlor, as opposed to trusts arising by operation of law or court order), with the exception of those trusts explicitly exempted under the new ITA section 150(1.2).
Notable exemptions in ITA section 150(1.2) include:
- trusts that have been in existence for less than 3 months;
- trusts holding only cash, government bonds, and portfolio securities having a fair market value of less than $50,000;
- lawyer’s pooled trust funds and other similar arrangements; and
- trusts governed by registered plans (including RRSPs and TFSAs).
Additionally, the new requirements will apply to non-resident trusts, but only for taxation years in which the non-resident trusts have income or dispositions of taxable Canadian property.
The New ITA Filing Requirement
Under current rules, trusts are exempt from filing a T3 return for taxation years in which the trust had no income or dispositions of taxable capital property. The new rules will eliminate this exemption for all trusts, with the exception of non-resident trusts and the limited categories of trusts explicitly excluded from the new requirements (per above). In other words, the rules create an obligation to file a T3 in every taxation year, even in cases where a trust has no income or gains to report.
The New ITR Trust Disclosure Requirement
Under the new rules, trusts will also be required to disclose, along with their T3 return, personal information about certain persons connected to the trust. Specifically, trustees must report the name, address, date of birth, jurisdiction of residence, and TIN, of each of the following, with respect to the trust:
- Settlors; and
- Other persons with the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust (e.g. a protector).
The task of identifying the individuals encompassed by these categories is not as straightforward as it might first appear. In particular, the categories of “settlor” and “beneficiary” both present challenges.
For the purpose of the new rules, “settlor” is given the meaning set out in section 17(5) of the ITA. This definition is exceedingly broad. It encompasses not only the persons who provided the initial property to settle the trust, but also any person who has ever loaned or transferred property, directly or indirectly, in any matter whatsoever, to the trust or for the benefit of the trust. The only exceptions to this are where the contributing person is dealing with the trust at arm’s length and:
- the loan was made at a reasonable rate of interest; or
- the transfer was made for fair market value consideration.
Conversely, “beneficiary” is not explicitly defined in the ITA or ITR for the purpose of the new trust disclosure rules. There is some uncertainty as to whether the disclosure requirement could extend to persons who are “beneficially interested” in the trust (a remarkably broad category, as defined in subsection 248(25) of the ITA). However, even if “beneficiary” is given its ordinary meaning (i.e. any person who is the object or potential object of the trust property), identifying the relevant individuals could still pose a challenge where the beneficiary scheme does not expressly name all of the beneficiaries—for example, where the term “lineal descendants” is used, or where the trust establishes conditions for certain individuals to meet in order to become entitled to trust property.
Section 204.2(2) of the ITA offers some relief in these circumstances: it provides that, where the identity of a beneficiary is unknown or unascertainable with reasonable effort, a trustee may meet their disclosure obligations by providing “sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.” The issue with this is that, where the beneficiary scheme itself is uncertain, it may not possible for the trustees to provide the requisite level of certainty.
The new federal trust reporting regime places a substantial burden on trustees to both make sense of and carry out a complex set of new obligations. For some types of trusts—for example, trusts that hold non-income generating property, or trusts created as part of an estate freeze—this may be the trustee’s first time filing a T3 in relation to the trust. Moreover, for a trust with any degree of complexity, the task of identifying and collecting information from all relevant persons (some of whom may be elusive or uncooperative) is sure to pose a significant challenge.
Thanks to the CRA’s recent announcement, trustees now have the luxury of more time to prepare for the coming into force of the new rules. Trustees should use that time wisely to fully understand their obligations and make headway on gathering the necessary information, particularly where there is uncertainty over the extent of one’s disclosure requirements. Even where trustees were on track to meet the initial 2022 filing deadline, circumstances may change in the interim that require additional reporting.
If you have questions or would like assistance with navigating the new federal trust reporting rules, please contact a member of our Estates & Trusts Practice Group.