New trust reporting rules coming into effect on Dec. 31, 2022 year ends
TAX ALERT | September 14, 2022
Authored by RSM Canada
Update: On December 15, 2022, the legislation containing the below amendments received Royal Assent.
Update: On November 4, 2022, Parliament tabled Bill C-32 which includes the changes discussed herein. These rules are now slated to apply to taxation years ending after December 30, 2023 as opposed to December 30, 2022. The proposed amendments are subject to change until Bill C-32 receives Royal Assent.
Bare trusts may face additional reporting requirements in light of new draft legislation.
Since the tabling of Budget 2018, the federal government has been working on expanding tax reporting rules for trusts. On Aug. 9, 2022, the newest update to these proposed changes was published. If these changes receive Royal Assent, they will apply to taxation years ending after Dec. 30, 2022.
The expansion to the trust reporting rules comes in two parts – i) more trusts will be required to file an annual return; ii) additional disclosure will be required in those filed returns.
Currently, trusts are only required to file a tax return where they have Part I tax payable, are a Canadian resident trust who has a taxable capital gain or disposed of capital property in the year or are a non-resident trust who, except for excluded dispositions, has a taxable capital gain or disposed of Canadian capital property in the year.
The proposed changes require Canadian-resident express trusts to file a trust return regardless of the trust’s activity for the year. Notably, bare trusts will be required to file a tax return starting for the 2022 taxation year. Certain trusts will still be exempted from filing a return.
Trusts who file a return will be required to provide the name, address, date of birth, jurisdiction of residence and taxpayer identification number of each trustee, beneficiary, settlor and person who has the ability to exert influence over the trustees’ decisions regarding the appointment of income or capital of the trust.
The new rules acknowledge the trust may not have information on every beneficiary of the trust. The trust is required to provide the required information on each beneficiary who is known or ascertainable with reasonable effort. For beneficiaries who cannot be ascertained, the trust is to provide sufficiently detailed information to determine whether a particular person is a beneficiary of the trust. Certain trusts with Indigenous beneficiaries or that have units listed on a designated stock exchange will have fewer disclosure requirements relating to beneficiaries.
The newly introduced subsection 150(1.2) provides a list of specific types of trusts which will continue to be exempt from filing T3 trust returns as long as these specific types of trusts have no tax payable, are a Canadian resident trust who do not have a taxable capital gain or disposed of capital property in the year or are non-resident trusts who did not have taxable capital gains or disposing of Canadian capital property in the year. The list includes trusts that have been in existence for less than three months at the end of the year, registered charities and trusts governed by certain registered plans.
No trust will be required to disclose information subject to solicitor-client privilege.
Failure to file a required return by the deadline will incur a penalty of $25 dollars a day, with a minimum penalty of $100 and a maximum penalty of $2,500.
A newly proposed penalty will make a person or partnership liable to pay a penalty if the person or partnership:
a) Makes or acquiesces to a false statement or omission on a trust return or fails to file a trust return either knowingly or in circumstances amounting to gross negligence or
b) Fails to comply with a demand to file a return.
The penalty will be equal to the greater of $2,500 and 5% of the highest fair market value of the property held by the trust during the year.
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This article was written by Cassandra Knapman, Lingzi Layman and originally appeared on Sep 14, 2022 RSM Canada, and is available online at https://rsmcanada.com/insights/tax-alerts/2022/new-trust-reporting-rules-coming-into-effect-on-dec-31-2022-year-ends.html.
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