Changes in Tax Filing Requirements for Trusts

The Income Tax Act is being amended to impose additional filing requirements for certain trusts for the 2021 and subsequent taxation years. Failure to comply with the new filing requirements can result in harsh penalties.

Currently, trustees of testamentary trusts (trusts established as a consequence of death) and inter vivos trusts (trusts established during the lifetime of the settlor) must file an annual income tax return called a T3 return within 90 days of the trust’s year end. The Canada Revenue Agency’s administrative position is that a trust is required to file an income tax return only if the trust owes income tax, has a taxable capital gain or disposed of capital property, has income of more than $500 in the year, has provided a benefit of more than $100 to a beneficiary, has allocated more than $100 to a beneficiary, makes a capital distribution to a beneficiary or allocates any income to a non-resident beneficiary. If none of those apply, the trust is not required to file a T3 return. This would be the case for example if the trust’s only property was a cottage or other residence or shares of a private company which did not pay any dividends.

For 2021 and subsequent taxation years, however, trusts that are resident in Canada, with some exceptions, and trusts that are deemed to be resident in Canada will have to provide additional information to the Canada Revenue Agency each year in a new schedule. In order to do this, those trusts will have to file a T3 return.

The trusts that the changes will apply to are all express trusts and all non-resident trusts which currently have to file a T3 return. The Canada Revenue Agency describes an ‘express trust’ as one created by the settlor’s express intent and usually made in writing as opposed to trusts which arise by operation of law or under the terms of a statute. The new filing requirements will not apply to mutual fund trusts, trusts governed by registered plans (such as RRSPs), lawyers’ general trust accounts, graduated rate estates, qualified disability trusts, trusts that are non-profit organizations or registered charities, and trusts that have been in existence for less than three months as of the end of a calendar year. Trusts with less than $50,000 in cash or public company investments may also be exempt.

Express trusts will be required to complete an additional schedule for filing with the T3 return. The new schedule will have to set out information about the identity of the trustees, the beneficiaries, and the settlors of the trust, as well as information about any other person who can control the trust (such as a protector). The required information will include the name, address, date of birth, residence jurisdiction, and taxpayer identification number (such as a social insurance number) for each person.

Failure to file the additional schedule with a T3 return will subject the trust to a penalty of $25.00 for each day of delinquency with a minimum penalty of $100.00 and a maximum penalty of $2,500.00. Additional penalties will apply if the failure to file the return was made knowingly or due to gross negligence or by failing to file a return when demanded by the CRA. The additional penalty will be equal to five percent of the maximum value of the property held during the year by the trust with a minimum penalty of $2,500.00.

It is important that trustees become aware of this new filing requirement and ensure that they have all of the necessary information about the settlors, the trustees and the beneficiaries in order to file the additional schedule starting with the 2021 T3 return which will be due 90 days after December 31, 2021.

This article is not intended to serve as a comprehensive treatment of the topic and is not legal advice. All legal matters are dealt with pursuant to their specific facts and circumstance. Nothing replaces retaining a qualified, competent lawyer.