Trusts In Canada: What Are They And How To File A Trust Return (T3)?
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16 Feb 2024
vs.
Of course, both can hold assets and conduct transactions. However, certain key differences set them apart:
Trusts are not separate legal entities like corporations, but that doesn’t mean that they don’t have any legal obligations. They may have to pay taxes under Canadian law.
There are two main types of trusts in Canada:
Unless they meet specific conditions, all trusts must provide a T3 return along with the beneficial ownership information annually for a taxation year ending after December 30, 2023. This includes bare trusts and those with no taxable income.
Trusts In Canada: What Are They And How To File A Trust Return (T3)?
This year, trust returns are hotter than maple syrup on Canada's tax scene. Why? The rules for filing annual T3 Trust Income tax returns have changed. Unless they meet specific conditions, all trusts must provide a T3 return along with the beneficial ownership information annually for a taxation year ending after December 30, 2023. Also, the bare trusts may have to file a T3 Return annually. Due to this regulation, many trusts that were not filing their returns previously may not have to file their T3 returns annually. Given that trust returns are due for filing in March, it becomes important to go through all the details regarding how T3 returns work in Canada. Give this blog a read to find out if you have missed out on anything for filling your T3 tax return this year. Before you read further: Don’t forget to book your free consultation with a CPA in Surrey Canada for filing trust returns. Establishing a trust for the first time… no worries, CJCPA will help you!What do we mean by a “Trust” in Canada?
In Canada, a “trust” is a legal “relationship”. This relationship is between the settlor (the one who will transfer its assets), the trustee (the one who is responsible for managing these assets), and the beneficiary (the one who will benefit from these assets). Understand it better: You can think of it as a locked box with someone (trustee) holding the key and instructions (trust deed) on how to manage the contents (assets) for the benefit of others (beneficiaries).How is a trust different from a corporation?
vs.
Of course, both can hold assets and conduct transactions. However, certain key differences set them apart:
Separate Legal Entity
A corporation is legally a separate entity from its owner (shareholders). Trusts, on the other hand, are not. Trust is simply a legal relation between different parties, and the assets technically belong to the beneficiaries, not the trust.Purpose
The primary purpose of corporations is to do commercial activities and generate profits out of them. However, trusts can have many purposes for which they were founded. For example, wealth management, inheritance planning, tax reduction, and charitable giving, are some of the reasons why trusts are established.Management
A board of directors or officially appointed officers manage a company. However, trusts don’t run like that. The appointed trustee manages the assets as per the guidelines of the trust deed.Transparency
Of course, there are stricter reporting rules for corporations for shareholders and the public. On the other hand, trusts generally operate more privately, though beneficiaries have the right to information.What are the different types of trusts available in Canada?
Trusts are not separate legal entities like corporations, but that doesn’t mean that they don’t have any legal obligations. They may have to pay taxes under Canadian law.
There are two main types of trusts in Canada:
Testamentary Trusts:
Think of them as "after-death trusts." It acts like a will, where it mentions how an asset under the trust will be managed, or how a beneficiary will receive the benefit, once the settlor has passed away. “Like giving instructions in a letter about how to divide your belongings after you're gone.” Providing for minor children until they reach adulthood, caring for someone with a disability, and distributing assets in a specific way according to the testator's wishes, which might differ from the rules of inheritance, are some of the common uses of Testamentary Trusts.Inter-Vivos Trusts:
Imagine these as "living trusts." Also known as living trusts, inter-vivos trusts are legal arrangements one creates while they are still alive to manage the assets and distribute them according to their wishes after they pass away, or even during their lifetime. “One may give away some of their belongings when they are alive, and set up rules for how the beneficiary can use them, even when the giver of the assets is alive.” Where are they used commonly: When you want to avoid probate and make transferring of assets easy, protect your assets from lawsuits or creditors, minimize your taxes with income splitting, or plan your future in case you are incapacitated. Note: These are the major categories of trusts. There are 4 types of Testamentary trusts and 30+ types of inter-vivos trusts. Check out the official link to learn more about different types of trusts in Canada If you wish to leverage the benefits of trusts as an individual or businessperson, then you must familiarize yourself with different types of trusts.How do I file a return on trust: The T3 tax returns?
Unless they meet specific conditions, all trusts must provide a T3 return along with the beneficial ownership information annually for a taxation year ending after December 30, 2023. This includes bare trusts and those with no taxable income.
Who needs to file: Generally, you must file a T3 return if your trust:
- Is tax payable or it is requested to be filed by the CRA.
- Has disposed of or deemed disposed of a capital property in Canada.
- Is a non-resident trust with taxable capital gains or has disposed of taxable Canadian property.
- Is a deemed resident trust.
Required documentation:
- Form T3RET: Trust Income Tax and Information Return
- Guide T4013: T3 Trust Guide
- Supporting documentation – income and deductions
- Trust account number (if available)
- Web access code (WAC) for online filing (if available)
Reporting on the T3 Return:
- Complete the T3RET form, reporting all income, deductions, and beneficiary information.
- Schedule 15: Beneficial Ownership Information of a Trust, must be completed for most trusts, disclosing beneficial ownership details.
- File the return electronically or paper-based.
Penalty for non-compliance:
- Consult Corporate Planning & Compliance Canada firms for accurate information.
What are the benefits of having a trust in Canada?
Establishing trust is a smart strategy. It helps you lower the tax burden, make a strategy around asset transfer, and also safeguard your assets from potential threats, such as lawsuits and creditors. With trust, you secure the financial future of your next generation. Time and again, business owners have established a trust to deal with their wealth. Find out if a trust might be the right choice for you.Benefits of Trusts:
Estate Planning:
- Control & Flexibility: One can dictate how assets must be distributed and used, even after they pass away. You can set how the beneficiaries will receive the benefit, how it protects the minors, and how the funds will be used.
- Avoid Probate: Trust is an effective strategy against the time-consuming, costly, and complex process of probate. Also, you don’t have to deal with public disclosure.
- Reduce Taxes: Also, a trust can even split the income it generates among its beneficiaries in lower tax brackets. This strategy helps minimize the overall tax burden.
- Protect Assets: If you establish the trust with proper safeguards, you can protect your assets from creditors, lawsuits, and remarriage issues.
Other Benefits:
- Charitable Giving: Trusts can facilitate planned giving and ensure specific charities receive designated funds.
- Disability & Creditor Protection: Trusts can manage assets for beneficiaries with disabilities or protect them from creditors.
- Business continuity: Trusts can hold business assets to ensure succession and smooth operation.
Tax Implications:
- Trust Tax Rates: Tax rates of trusts, depending upon their type, could range anywhere between 15% to 33%.
- Income Taxable to Trustees or Beneficiaries: Given the type or conditions of the trust, you can also distribute a part of the trust income to beneficiaries. However, note that this will impact the beneficiary’s individual tax brackets.
- Capital Gains Tax: Trusts pay capital gains tax on disposed-of assets at individual rates.
- Deemed Dispositions: Certain events like settlor death trigger "deemed dispositions" where assets are revalued and potential capital gains taxed.
Tax Planning Strategies:
- Income Splitting: Allocate a part of the overall income to beneficiaries in lower tax brackets that justifies their work at the trust. Through this, you’ll reduce the overall tax burden.
- Capital Gains Deferral: Use specific trust types to defer capital gains tax on specific assets.
- Charitable Donations: Utilize trusts for tax-efficient charitable giving through qualified donation funds.
