From where do trust filing requirements arise?

Executive summary

The obligation to file a T3 return comes from both section 150 and regulation 204 of the Income Tax Act. These provisions have different scopes of filers but also require filing different types of returns.

Trusts may be required to file a “prescribed form” each year under section 150 of the Income Tax Act (Act) and/or regulation 204 of the Income Tax Regulations (Regulation). The types of trusts required to file under the two provisions differs. The regulation generally applies to more trusts, though starting with taxation years ending after Dec. 30, 2023, the types of trusts required to file a return under section 150 were increased. The Canada Revenue Agency (CRA) has prescribed the T3 return to fulfill both filing requirements despite the provisions’ inconsistencies in required filers, creating potential confusion on filing obligations.

Regulation

The regulation requires almost all trusts to file a return. Exempted from filing are:

1. Trusts governed by:
   • a deferred profit-sharing plan or revoked plan
   • first home savings account
   • an employees profit sharing plan;
   • an eligible funeral arrangement;
   • registered education savings plan
   • a Tax-Free Savings Account (TFSA) or by an arrangement that is deemed to be a TFSA; or
   • a registered disability savings plan (with some exceptions)
2. a registered charity;
3. a cemetery care trust;

The CRA further narrows the scope of filers using its administrative authority.

Section 150

Trusts are only required to file under section 150 for the taxation years where the trust either:

• Is a Canadian resident express trust (or for civil law purposes, a trust other than a trust that is established by law or by judgement) that is not a listed trust, or;
• Meets one or more of the following criteria:
  • has Part I tax payable,
  • is a Canadian resident trust who has a taxable capital gain or disposed of capital property in the year,
  • is a non-resident trust who, except for excluded dispositions, has a taxable capital gain or disposed of Canadian capital property in the year.

Listed trusts include:

• Trusts in existence for less than three months during the year.
• Trusts who hold less than $50,000 in certain assets, including money or shares of a publicly traded company, throughout a year,
• General trust accounts for legal practitioners and;
• Non-profit organizations and graduated rate estates.

All trusts exempted from the regulation are listed trusts apart from trusts governed by revoked deferred profit benefit sharing plans and trusts governed by deemed TFSAs.

Reconciling section 150 and the regulation

Two categories of tax returns are created by the Income Tax Act:

• Information Returns – These do not directly result in an assessment of tax, but information disclosed is used to administer taxation and may result indirectly in an (re)assessment.
• Returns of Income – These generally results directly in the assessment of tax.

Despite the use of the T3, the regulation and section 150 differ not only in who is required to file, but what type of return must be filed. The regulation is an information return filing requirement. On the other hand, section 150 is an obligation to file a return of income. Therefore, a trust could have an information return filing requirement but not an income tax filing requirement, and vice versa. Per the CRA, the T3 is both an information return and income tax return. The CRA affirmed this conclusion in View #2006-0196201C6.

Who Should File?

The CRA publishes an annual Trust Guide setting out what trusts are expected to file a T3 return, as well as implicitly providing administrative exceptions to filing for trusts not listed. Both section 150 and regulation operate as legislative and regulatory authority to require filing for various trusts enumerated in the guide.

Impact on Penalties

Penalties assessable will depend on whether the trust’s filing obligation arises from section 150, the regulation or both. Failure to file as and when required by the regulation incurs a failure to comply penalty, but this penalty is not applicable where the failure to file is penalized under another provision. Therefore, per View #2021-0895261E5, a delinquent filer with reporting obligations under both the regulation and section 150 would be penalized under failure to file return of income and/or repeated failure to file.

Grossly negligent reporting by trusts whose T3 obligation arises solely from the regulation is not subject to the new gross negligence penalty introduced when section 150 was expanded, but trusts required to report under section 150, except listed trusts, may face this penalty.