2017-0693371C6 2017 STEP – Q12 - 75(2) and T3 Reporting

Principal Issues: Is the stated reporting method in the T3 Guide in respect of amounts attributed pursuant to subsection 75(2) correct?

Position: Yes.

Reasons: Consistent with the law.

Author: Kohnen, Phil
Section: 75(2); 104(6); 150; 221 and Reg 204(1)

STEP CRA Roundtable – June 13, 2017

Question 12.  Subsection 75(2) and T3 reporting requirements

As most trust and tax practitioners know, subsection 75(2) of the Income Tax Act will attribute trust income, losses, capital gains and capital losses to the contributor / settlor if certain conditions are met. The 2016 T3 Guide (T4013) states the following:

Certain related amounts, including taxable capital gains and allowable capital losses from that property or the substituted property, are considered to belong to the contributor during the contributor’s life or existence while a resident of Canada. The trust must still report the amount on the trust’s T3 return and issue a T3 slip reporting the amount as that of the contributor of the property.

While the recommended approach to report the amount of the attributed income is certainly a good practical approach, it may not be consistent with the law.  Subsection 104(6) will only provide a deduction against trust income for amounts paid or payable to the beneficiaries which requires the issuance of a corresponding T3 slip to the recipient beneficiaries.  In many cases, however, the terms of the trust that is affected by subsection 75(2) will not have any amounts paid or payable to the contributor / settlor and ultimately the taxation of the applicable amounts in the contributor / settlor’s hands is only because of subsection 75(2) and not subsection 104(6).  Accordingly, when preparing the accounting records for the trust, the subsection 75(2) attributed amounts are not recorded as being paid or payable to the contributor / settlor since the facts of the particular case will often not require the actual payment of such amounts to the contributor / settlor. Given such, many practitioners do not agree that a T3 slip should be issued to the settlor and, instead, the attributed amounts should simply be recorded as an elimination of the applicable reported amounts on the T3 return and a subsequent direct reporting by the contributor / settlor.  Can the CRA comment on this approach please?

CRA Response

In response to question 3 at the 2006 STEP Roundtable, CRA commented as follows:

A T3 Trust Income Tax and Information Return is both a return of income and a general information return.  A T3 trust return serves to report not only information about the reporting trust, but also additional information, such as that affecting the taxation of persons (for example, beneficiaries or settlors) having some connection to the trust.

Consistent with this is the additional requirement for the trust to issue a T3 slip to persons whose own income tax requirements may be affected by arrangements involving the trust.  These persons include those to whom an amount is attributed from the trust under one of the statutory attribution rules.  The information provided under these reporting mechanisms is necessary for the proper administration of the tax system.

These specific reporting requirements are imposed by section 204 of the Income Tax Regulations.  The statutory power to promulgate this regulation is not limited to section 150 of the Act - which speaks directly to the requirements for income tax returns - but is also found in section 221 of the Act.  Section 221 of the Act contains a broad range of prescribing powers, including the powers to promulgate regulations imposing requirements to file information returns.  Therefore, given the nature of the T3 return as both a return of income and an information return, the statutory requirement to file a T3 return exists where the trustee has control of or receives income, gains or profits in the trustee's fiduciary capacity, even if the trustee computes nil income for the trust for tax purposes.  This includes circumstances where the trust has no income for tax purposes because subsection 75(2) of the Act applies to recognize amounts as another person's for tax purposes. (endnote 1)

In our view, these comments remain relevant and are supported by the law. It is important to note when considering the issue that, as noted in the above response in 2006, the filing requirements in respect of a trust are not confined to filing only a return of income – the Income Tax Regulations also impose information filing requirements.  Accordingly, an analysis of the question posed does not conclude by looking solely to whether or not a deduction pursuant to subsection 104(6) is applicable (whether amounts were paid or payable to beneficiaries of the trust in the taxation year).

2017-069337
Phil Kohnen

ENDNOTES

1 CRA document 2006-0185561C6, as well as related comments in 2006-0196201C6 (from the 2006 APFF Conference)

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