Trusts:

Before 2021, a trust was only required to file an annual income tax return (T3) under certain conditions:

• if it had taxes to pay;
• if it disposed of property during the year; or
• if it distributed part or all of its income or capital to its beneficiaries.

From now on, all express trusts¹ resident in Canada, as well as non-resident trusts that usually have to file a T3 return, will be required to provide additional information annually in a schedule called the Beneficial Ownership Schedule, which must be attached to the T3.

This means that passive trusts that have no income to report and currently have no tax filing requirements (for example, testamentary trusts that hold non-income producing real estate such as a principal residence or a cottage) will now be required to file a T3, as well as this new beneficial ownership schedule. Note that this new schedule cannot be filed alone: ​​it must filed with a T3.

¹ Express trust: a trust usually created in writing by a settlor during their lifetime, or upon their death by will.

For the tax year ending December 31, 2021 and all subsequent years, trusts will have to report on the new schedule attached to the T3, the name, address, date of birth (in the case of individuals), business number (for businesses and corporations), account number (for trusts) and jurisdiction of residence of each:

• settlor
• trustee
• beneficiary
• person who has the ability to exert influence over trustee decisions regarding appointment of income or capital of the trust (e.g. “a protector”)

For some trusts with a long list of beneficiaries, collecting the information necessary to comply with this reporting obligation could be onerous.

The CRA introduced this new reporting requirement in order to be able to determine the tax payable by trusts and all their beneficiaries. In addition, this will allow it to improve the collection of information on beneficial ownership of trusts.

Certain trusts are exempt from filing T3 returns and the new beneficial ownership schedule if they have no tax payable, no taxable capital gain, and no disposition of capital property in the year, including:

• mutual fund trusts
• trusts under or governed by registered plans (e.g. pooled registered pension plans, registered education savings plans (RESPs), registered retirement savings plans (RRSPs), and tax-free savings accounts (TFSAs)
• cemetery care trusts and trusts governed by eligible funeral arrangements
• lawyers’ general trust accounts
• graduated rate estates
• qualified disability trusts
• trusts that qualify as non-profit organizations or registered charities
• trusts that have been in existence for less than three months

The penalties for failure to file the T3 return, including the new schedule, will be $25 per day (minimum $100) up to a maximum of $2,500.

Additional penalties may apply if the trust failed to file the documents "knowingly" or if there was gross negligence. In this case, the penalty could be up to 5% of the maximum value of the assets held in the trust during the year (minimum of $2,500). In addition, the penalties already provided for delays or failure to file the T3 return continue to apply.

It is strongly advised to comply with the law. Failure to do so could be very costly.

Note that this new reporting obligation, announced in the 2018 federal budget and applicable as of this year, increases the administrative burden on trust trustees. Gathering all the necessary information could be complex, especially for trusts that have not had to file a T3 return for many years. Keeping the information in the trust book up to date is now more essential than ever.