TRUSTS – CHANGES TO REPORTING REQUIREMENTS

planning for expanded estate and trust filing requirements commencing with December 31, 2021 year-ends

On July 27, 2018 the Department of Finance released draft legislation relating to portions of the 2018 Budget not already legislated, including proposals to significantly reduce situations where trusts (including estates) are not required to file tax returns, and add new disclosure requirements. These proposals will be effective for tax years ending after December 30, 2021.

More trusts and estates required to file
Tax
returns will be required for all Canadian resident express trusts (this generally means trusts created deliberately) which do not meet at least one of a number of exceptions, including:

  • trusts in existence for less than three months at the end of the year;

no exception for trusts holding private corporation shares

  • trusts holding only assets within a prescribed listing (including items such as cash and publicly listed shares) with a total fair market value that does not exceed $50,000 at any time in the year;
  • certain lawyers’ trust accounts, mainly general trust accounts;
  • registered charities and non-profit clubs, societies or associations (Paragraph 149(1)(l));
  • mutual fund trusts;
  • graduated rate estates;
  • qualified disability trusts;
  • employee life and health trusts; or
  • registered trust accounts like RDSPs, RESPs, RRSPs, RRIFs and TFSAs.

Under the existing rules, many more trusts are exempt from filing if they had no taxes payable and no dispositions of capital property. CRA’s T3 Trust Guide sets out their criteria for considering a trust exempt from filing a return.

More disclosure of parties to trusts
Where a return of income is required, identification and residency disclosure in the T3 Return will be required for each of the following persons:

  • trustees, beneficiaries and settlors; and

these additional disclosures commencing in 2021 

  • anyone that has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust.

this significant penalty provision

Substantial penalties
Failure
to make the required filings and disclosures on time attract penalties of $25 per day, to a maximum of $2,500 (Subsection 162(7)), as well as further penalties on any unpaid taxes (Subsections 162(1) and (2)). New gross negligence penalties have been proposed, applicable to filings not made on time or inaccurate filings. These penalties are proposed to be the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime, leading to the concern that multiple persons could be subject to these substantial penalties for a single trust.

Further commentary on these proposals
An August 13, 2018 Moodys Gartner article (Trust Reporting Rules – Draft Legislation Released, Kim G. C. Moody FCA TEP) discussed these proposals in detail.

In a September 10, 2018 submission, the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada expressed several concerns regarding these proposals, including:

  • The narrow exceptions will impose compliance obligations disproportionate to the tax risk in some situations, specifically citing:
    • the $50,000 de minimis asset limit, as well as basing that limit on assets’ fair market value, which fluctuates, rather than on their cost;
    • trusts established for the purpose of security related to arm’s length business sales;
    • trusts established for non-taxable purposes, such as ownership of personal use property in a family context;

     communicating these concerns to affected clients and government representatives

    • short-term estates, noting that these are rarely wrapped up in three months;
  • potential filing obligations for some lawyers’ trust accounts, as well as similar arrangements involving professionals like notaries and real estate brokers, including the potential violation of solicitor-client privilege; and
  • the harsh and substantial gross negligence penalties, including their potential application to errors in interpreting highly complex rules such as the deemed resident trust provisions (Section 94).

This submission also discussed the proposed at-risk rules for tiered partnerships and international tax measures including the reduced, six-month, deadline for foreign affiliate reporting (Form T1134).

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