Attention small business owners! If trusts are a part of your estate planning and retirement funding, you ought to familiarize yourself with the federal government’s proposed new reporting requirements for trusts. If these proposals become law, they would be applicable for the tax year ending December 31, 2022. Any non-compliance with these reporting requirements could result in a hefty penalty that could go up to $2,500 or more. The new amendment is significant as it brings bare trusts under the disclosure requirement.
In this article, we will understand the proposed changes to the reporting requirements of a trust and what you should do.
Important Dates of the New Reporting Requirements on Trusts
It all started in Budget 2018 when the federal government proposed legislation to increase the reporting requirements of trusts. After several delays, the government released amendments to the draft legislation on February 4, 2022, and now on August 9, 2022. The amendments bring trusts excluded from the original proposal (2018) into the increased beneficial ownership disclosure.
Whether or not the proposals receive Royal Assent and become law, you need to understand the disclosure requirement as it will take time to collect all information. Under the new August 2022 amendments, more trusts will come under an obligation to file a T3 return and would be required to disclose more information.
More Trusts Need to File a T3 Return
The current legislation relieves trusts with resident beneficiaries from filing T3 returns until they generate an income tax liability or dispose of capital property.
The new amendment requires all resident trusts to file T3 returns even if they did not generate a tax liability or made no distributions or allocations during the year. It also includes non-resident trusts, bare trusts, and express trusts. A small business owner who has put his company’s shares in a trust and has made no transactions has to file T3 returns.
However, there are always exceptions to the rules. The following trusts have been excluded from the T3 returns requirement:
- Mutual fund trusts, segregated funds, and master trusts
- Registered savings plans (RRSP, TFSA, RESP)
- First home savings account
- Trusts that qualify as non-profit organizations or registered charities
- Graduated rate estates, qualified disability trusts, employee life and health trusts, and certain government-funded trusts
- Trusts under an employee profit-sharing plan
- Registered supplementary unemployment benefit plans
- Lawyers’ and other professionals’ general trust accounts
- Cemetery care trusts and trusts governed by eligible funeral arrangements
Other than the above trusts that have a specific objective, the following trusts are also exempt from the reporting rule:
- New trusts created less than three months before the year-end
- Trusts whose units are listed on a designated stock exchange
- Trusts holding less than $50,000 in assets during the taxation year.
In the third scenario, the holding assets should be deposits, government debt obligations, and listed securities. If your holdings include private company stocks, they are taxable.
Consult your accountant or tax expert advisor, to know if your trust falls under the new reporting requirements. Even if there is no tax liability, be prepared to file T3 returns.
Information To Be Disclosed in the T3 Return
The draft legislation has also increased the information required to be disclosed in the T3 forms and schedules. They include the identification information for all parties linked to the trust:
- Trustee
- Beneficiaries
- Settlor (person who sold or loaned property to the trust), and
- A person who can influence the trustee’s decisions regarding the appointment of income or capital of the trust.
The Canada Revenue Agency is yet to prepare the T3 schedule. But you will have to disclose the above parties’ name, address, date of birth, jurisdiction of residence, and taxpayer identification number (TIN).
What Should You Do To Avoid Penalty?
The above amendments might include the trusts you created to protect your personal-use assets. As they were never a requirement to file T3 returns, you might have to start preparing accounting records of all the income and capital added and held by the trust in the 2022 tax year. All transactions must be disclosed, except for communications protected by solicitor-client privilege.
Although the new amendments are yet to receive Royal Assent, it is advised you start collecting information. If these amendments become law, any delay in complying with the disclosure requirements will result in a late filing penalty of $100 to $2,500 ($25 a day). In addition, any error, omission or failure to file a return, knowingly or due to gross negligence, will result in another penalty. This penalty is higher of $2,500 or 5% of the maximum value of the trust assets during the year.
Small business owners having a trust should talk to accountants and advisors to identify trust arrangements with non-active assets or personal-use assets.
Contact Glenn Graydon Wright LLP in Oakville for Trust Reporting and Accounting Needs
A skilled accountant can help you determine whether your trust falls under the proposed legislation and keep your trust accounts updated and compliant with new requirements. At Glenn Graydon Wright LLP, our accountants can provide services to support your trust accounting and T3 reporting, whether you need partial or complete support. To learn more about how Glenn Graydon Wright LLP in Oakville can provide you with accounting expertise, contact us online or by telephone at 905-845-6633.