New Filing Requirements for Trusts
Many Canadian trusts will soon have to face new enhanced reporting requirements. The new trust reporting rules apply to tax years ending after December 30, 2021 (i.e. effectively the rules apply to a trust’s tax year ending on December 31, 2021 and subsequent).
Subsection 150(1) of the Act stipulates the tax return requirements and the filling dates for different categories of taxpayers, including trust. Subsection 150(1) provides that, subject to subsection 150(1.1), a trust is to file an income tax return within 90 days of the end of the calendar year.
The existing subsection 150(1.1) sets out exemptions to subsection 150(1). Essentially, the exemptions provide when a tax return does not need to be filed pursuant to subsection 150(1).
Very generally, under the existing subsection 150(1.1), a personal trust does not need to file a tax return unless income from the trust property is subject to tax, and during the taxation year, the trust:
- has tax payable;
- is requested to file by the CRA;
- is resident in Canada and has either disposed of, or is deemed to have disposed of, a capital property or has a taxable capital gain (for example, a principal residence);
- is a non‐resident throughout the year, and has a taxable capital gain or has disposed of taxable Canadian property;
- is a deemed resident trust;
- holds property that is subject to subsection 75(2) of the Act;
- has provided a benefit of more than $100 to a beneficiary for upkeep, maintenance, or taxes for property maintained for the beneficiary’s use;
- receives from the trust property any income, gain, or profit that is allocated to one or more beneficiaries, and the trust has:
- total income from all sources more than $500;
- income of more than $100 allocated to any single beneficiary;
- made a distribution of capital to one or more beneficiaries; or
- allocated any portion of the income to a non‐resident beneficiary.
The 2018 Budget proposed to amend subsection 150(1.1) to provide that the exemption for filing returns outlined in that subsection do not apply to an express trust (or for civil law purposes, a trust other than a trust that is established by law or by judgment), that is resident in Canada, unless the trust meets one of the exemptions outlined in the new paragraphs 150(1.2)(a) to (n).
While the term “express trusts” is not specifically defined in the draft legislation or the Act, it is commonly understood to mean the trust that arises from the explicit instructions of the settlor or testator. A “non‐express trust” is a trust that is imposed by courts such as a resulting trust or a constructive trust.
New subsection 150(1.2) of the Act requires that a trust that is resident in Canada, including trusts that are deemed resident in Canada under section 94 of the Act; and that is an express trust (or for civil law purposes a trust other than a trust that is established by a law or by judgment) file a tax return notwithstanding that they meet one of the exemptions for filing a tax return listed in subsection 150(1.1) unless the trust meets one of the following exemptions:
- trusts that have been in existence for less than three months;
- trusts that hold assets with a fair market value that do not exceed $50,000 throughout the year, if the only assets held by the trust throughout the year are one or more of the following:
- certain government debt obligations;
- a share, debt obligation or right listed on a designated stock exchange;
- a share of the capital stock of a mutual fund corporation;
- a unit of a mutual fund trust; and
- an interest in a related segregated fund (within the meaning assigned by
paragraph 138 (1.1)(a));
- trusts that are required under the relevant laws of professional conduct or the laws of Canada or a province to hold funds for the purposes of an activity that is regulated under the rules of those laws. For example, a lawyer’s general trust account would be included but not specific client accounts;
- trusts that qualify as non‐profit organizations or registered charities;
- mutual fund trusts, segregated fund trust and master trusts;
- graduated rate estates;
- qualified disability trusts;
- employed life and health trusts;
- certain government funded trusts;
- trusts under or governed by a deferred profit sharing plan, a pooled register pension plan, registered disability savings plan, a registered pension plan, a registered retirement income fund, registered education savings plan or a registered retirement savings plan; and
- cemetery care trusts and trusts governed by an eligible funeral arrangement.
Trusts that fail to report required information may face significant penalties of up to 5% of the highest total fair market value of all property held within the trust during the year.