Trusts are not technically legal entities. Rather, it’s the trustees,
acting on behalf of the trust, who have legal capacity. In fact, when I
draft documents to which a trust is a party, the contracting person is
actually the trustee of the trust, and not the trust itself. Yet, under the Tax Act in Canada, a trust is a separate taxable entity, which
means that it is a taxpayer in its own right and has to report any income
and pay taxes on that income (to the extent it has not allocated any income
out in the same taxation year to a beneficiary). This means a trust has to
also file a tax return.
Trusts are like individuals in that they must have a calendar year end. In
order to ensure that a trust is able to allocate its income to its
beneficiaries so that income is taxed in the beneficiaries’ hands and not
in the trust, allocations and trustee resolutions evidencing the
allocations must be done by the end of the day on December 31.
The problem is that if a trust happens to hold an investment account, the
trustees won’t actually know what the income for the full year will be
until after December 31. So we normally advise trustees to
document the allocation as a percentage of the total net income for the
year, even though they don’t have the actual numbers.
Filing a return
Another anomaly with trusts is that unlike individuals, a trust has a much
shorter period in which it has to file a return (known as a T1). You and I
have until April 30 of the following year to file our tax returns. However,
a trust must file its tax return within 90 days of its year-end, meaning
March 30. Why is that? Your guess is as good as mine.
Currently, filing a T3 has not been too taxing (pun intended). For those
who value privacy, the information to be disclosed as it relates to the
trust (other than its income) was relatively simple. The trustee, name of
the trust, and address had to be disclosed. If the trust distributed any
assets, the beneficiary that received the asset had to be listed. If there
was a change to the beneficiaries, that had to be disclosed and the name of
the new beneficiary had to be listed. But otherwise, the information
disclosed was not too onerous.
The new rules
However, earlier this year, the federal government announced new measures
relating to T3 filing and transparency. For 2021 and subsequent tax years,
additional information will be required on trust T3 filings (for both
domestic and non-resident trusts that are deemed resident).
Specifically, disclosure is to be made for all trustees, beneficiaries, and
settlors (including anyone who is able to exert control over trustee
decisions in relation to allocations of trust income or capital, such as a
Protector). Certain trusts are excluded, including graduated rate estates,
qualified disability trusts, nonprofit trusts, and registered charities or
trusts that are less than three months old or that generally hold less than
$50,000 worth of assets throughout the year (provided that the assets do
not include shares of a private company or real estate).
However, if you have a typical discretionary family trust that holds value
worth more than $50,000, then you no longer have the privilege of complete
privacy.
Knowing who’s who
So if you formed a discretionary trust where you included everyone but the
family dog as a discretionary beneficiary, the disclosure requirements may
well cause a large headache for you. What if your class of beneficiaries
includes contingent beneficiaries? How do you determine who needs to be
part of the disclosure? The proposed rules provide that the requirement to
disclose will be met if the required information is provided for each
beneficiary whose identity is known or ascertained with reasonable effort
by the person who is filing the return for the trust.
Under the existing rules, a trust may not be required to file a return in
certain circumstances, including if there is no trust income payable for
the year. However, under the new rules, a trust will be required to file a
T3 each year; this requirement is in respect of “express trusts.”
So what is an “express trust”? Although the Tax Act does not
actually provide a definition for an express trust, it appears that based
on common law and legal textbooks, an express trust would be one that is
deliberately created. So this would seem to capture all discretionary
family trusts. So the long and short of it is that every discretionary
family trust will be required to file a T3 every year, even if there is no
income for the year.
Putting the stick about
To reinforce these rules, new penalties will be introduced for failure to
file a T3 with the proper disclosure information ($25 a day with a minimum
of $100 and a maximum of $2,500). If the failure to file was made knowingly
or due to gross negligence, there is an additional penalty of 5% of the
maximum fair market value of the property held (with a minimum penalty of
$2,500). This latter penalty can end up being quite punitive if a family
trust is sitting on shares of a company that has significant value.
When I advise clients on whether to put a family trust in place, I always
remind them that the trust should file a T3 each year. But this will now be
a much deeper conversation. Previously, filing a nil return for a trust
would not make for a large project. However, even a nil return will require
a lot more thorough work into ensuring the proper disclosure is made every
year.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a
Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-author of
Tax and Family Business Succession Planning, 3rd Edition . She is also
co-editor of various Wolters Kluwer Ltd. tax publications.
Portions of this article first appeared in The TaxLetter, © 2018 by MPL
Communications Ltd. Used
with permission.
Disclaimer
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
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The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
personalized advice including, without limitation, investment, financial,
legal, accounting or tax advice.
