Regulation 204 - Estates and Trusts

Under s. 75(2), income is considered to be the income of another taxpayer (the trust contributor without the income being explicitly removed from the trust itself. This affects how the trust return is prepared; and whether liability for alternative minimum tax could arise. Satoma concluded that dividend income attributed under s. 75(2) was not income of the trust. Does CRA now accept that income subject to s. 75(2) is never income of the trust in the first place, so that it can be omitted from the trust return, and with no need to prepare a T3 slip?

CRA noted that Satoma indicated that, unlike other attribution provisions, e.g. s. 74.1, which specifically provides that the income is only income to the attributee, s. 75(2) is silent in this regard. However, Noël CJ. also noted express exclusions of this type are inserted for greater certainty, and that the same dividend cannot be received by two persons at once.

While acknowledging these comments, CRA indicated that they are not specifically directed at the T3 return, which is a return of information (in addition to a return of income) affecting the taxation of persons with some connection to the trust.

Reg. 204 imposes a requirement to file a T3 return where the trustee has control of, or receives, income, gains, or profits in the trustee’s fiduciary capacity – even if the Trust computes nil income. This includes circumstances where the trust has no income because of the application of s. 75(2). The trust must still report the income on its T3 return and issue a T3 slip reporting the amount as that of the contributor of the property.

Many practitioners do not agree that a T3 slip should be issued to the settlor of a s. 75(2) trust and, instead, the attributed amounts should simply be recorded as an elimination of the applicable reported amounts on the T3 return and there should be subsequent direct reporting by the settlor. Comments?

CRA responded that given the nature of the T3 reporting return as both a return of income and an information return, the statutory requirement (as per Reg. 204(1)) to file a T3 return exists where the trustee has control of, or receives, income, gains, or profits in the trustee’s fiduciary capacity. This is so even if the trustee computes nil income for the trust for tax purposes, as would be the case where s. 75(2) applies.

The analysis, as to how to report the income attributed under s. 75(2) to the contributor or settlor, cannot be based solely on whether or not a deduction pursuant to s. 104(6) is applicable, i.e., it does not hinge on whether s. 75(2) amounts were paid or payable to the beneficiaries.

The T3 Guide states:

A T3 return must be filed if the trust is subject to tax, and any one of the following conditions applies. The trust: … holds property that is subject to subsection 75(2) of the Act

Is such a trust is required to file a T3 return for a year regardless whether the property subject to s. 75(2) earns any income or profits, or generates a capital gain?

CRA noted that a T3 return is both an income tax and information return. Accordingly irrespective of s. 150(1.1), Reg. 204(1) provides that a trustee having control of or receiving income, gains or profits must file an information return. Accordingly, a T3 return is required for a trust with property subject to s. 75(2), even though the trust would actually have nil taxable income because of the application of 75(2), where that trustee is in control of or receives income, gains or profits in a fiduciary capacity in respect of that trust. However, if the trust only held property subject to s. 75(2) that did not generate any income, profits or gains, the trustee would not be so in control and no T3 return would be required.

Is a trust that only holds property subject to s. 75(2) that does not generate income required to file a T3 return? CRA responded:

[A] person who holds qua trustee property that is subject to subsection 75(2) will not be required to complete the T3 return in respect of a taxation year where such trustee does not control or receive any income, gains or profits in that taxation year.

A custodian appointed under a court order to have custody of the property of a member of a professional organization or a professional corporation for the purposes of managing, winding-up or selling the professional practice of the member or the professional corporation would be required to file T3 returns. "The provision is drafted broadly to cover all persons acting in a fiduciary capacity or a capacity analogous thereto."

Although RC considers the settlor/beneficiary of a bare trust to be the actual owner of the trust property for purposes of the Act, the fact that a trust nevertheless exists requires the filing of a T3 return in the circumstances explained in the T3 Guide.

What are the T3 filing deadlines for mutual fund trusts following a qualifying exchange where there is a continuing trust and a trust that disappears?

CRA noted that the deemed year end arising under s. 132.2(1)(b) for both trusts accelerated the return filing deadline under Reg. 204(2), except that for the trust that disappeared, Reg. 205(2) required it to file a return within 30 days of the day of the discontinuance of its business or activity. However, CRA went on to note that application could be made for a return-filing extension.