New Trust Reporting Rules

On November 4, 2022, the Department of Finance announced that implementation of the new trust reporting rules – initially announced in the 2018 federal budget – will be delayed until 2023. Under the current rules, a trust is generally only required to file an annual income tax (T3) return if the trust has tax payable or it distributes all or part of its income or capital to its beneficiaries. Under the new regime, which will apply for 2023 and subsequent taxation years, most trusts resident in Canada (or deemed resident in Canada), with some exceptions, will be required to file an annual T3 return. In addition, most trusts required to file a return will also have to provide additional information on an annual basis with respect to the trustees, beneficiaries, settlors, and each person who has the ability to exert control or override trustee decisions over the appointment of income or capital of the trust (e.g. a protector). Specifically, the trust return will now require disclosure of the name, address, date of birth, residence and taxpayer identification number (e.g. SIN) for each such person.

The legislation also provides for steep penalties in the event of non-compliance. The standard penalty will be $25 for each day of delinquency, with a minimum penalty of $100 and a maximum penalty of $2,500. However, if a failure to file the return was made knowingly, or due to gross negligence, an additional penalty equal to 5% of the maximum value of the trust’s property will apply.

Trustees should start preparing now by determining if the new rules apply and, if so, by gathering all of the relevant information for each of the trustees, beneficiaries, settlors and control persons. Going forward, trustees should also consider winding-up inactive trusts before the end of 2022 in order to avoid future compliance requirements.