Here are some of the key features concerning Family Trust Income Tax from the Federal Budget.
Family Trust Income Tax.
If a trust does not earn income or make distributions in a year it is generally not required to file an annual (T3) return of income. The budget proposes to require that certain trusts provide additional information on an annual basis. This information will include the identities of all trustees, beneficiaries, settlors of the trust, and each person who has the ability to exert control over trustee decisions regarding the appointment of income or capital of the trust.
The new requirements will impose an obligation on certain trusts to file a T3 return where one is currently not required and will apply to express trusts that are resident in Canada and to non-resident trusts that are currently required to file a T3 return.
Express trusts are generally created by the settlor’s express intent, usually made in a Trust Deed. Exceptions to this additional reporting may be allowed for the following types of trusts:
The budget also introduced new penalties for a failure to file a T3 return, including a beneficial ownership schedule where required, equal to $25 for each day, with a minimum penalty of $100 and a maximum penalty of $2,500. If a made knowingly, additional penalties will apply. Of course, existing penalties will also still continue to apply.
Business Income Tax
A. Passive Investment Income
There will be two limits to tax deferral advantages on passive investment income earned inside private corporations:
Investment income will be measured by a new concept of “adjusted aggregate investment income” which will be based on “aggregate investment income”. These will be adjusted to include the following:
The different treatment proposed regarding the refund of taxes imposed on eligible portfolio dividend income will necessitate the addition of a new RDTOH account (eligible RDTOH). The eligible RDTOH account will track refundable taxes paid under Part IV of the Income Tax Act on eligible portfolio dividends. Any taxable dividend (i.e., eligible or non-eligible) will entitle the corporation to a refund from its eligible RDTOH account.
The second RDTOH account (non-eligible RDTOH) will track refundable taxes paid under Part I of the Income Tax Act on investment income as well as under Part IV on non-eligible portfolio dividends (i.e., dividends that are paid by non-connected corporations as non-eligible dividends). Refunds from this account will be obtained only upon the payment of non-eligible dividends.
Cross-border surplus stripping using partnerships or trusts
The budget proposes new “look-through” rules for partnerships and trusts. These rules will allocate the assets, liabilities and transactions of a partnership or trust to its members or beneficiaries, as the case may be, based on the relative fair market value of their interests. This measure will apply to new transactions. Older transactions may be challenged using the general anti-avoidance rule.
The budget proposes modifications to certain rules related to foreign affiliates.
Investment Businesses: If a single foreign affiliate carries on multiple businesses, each such business would have to meet the six employees test in order to ensure that it is not an investment business. Certain taxpayers whose foreign investment activities would not warrant more than five full-time employees have engaged in tax planning with other taxpayers in similar circumstances seeking to meet the six employees test.
Each separate business of the affiliate will therefore need to satisfy each relevant condition in the investment business definition, including the six employees test, in order for the affiliate’s income from that business to be excluded from “foreign affiliate property income” (FAPI).
Controlled Foreign Affiliate Status: The budget proposes to deem a foreign affiliate of a taxpayer to be a controlled foreign affiliate of the taxpayer if FAPI attributable to activities of the foreign affiliate accrues to the benefit of the taxpayer under a tracking arrangement.
Personal Income Tax
A. Medical Expense Tax Credit
Proposal to expand the medical expense tax credits for expenses incurred for animals specially trained to perform tasks for a patient (ie., service dog trained to assist with ptsd).
B. Registered Disability Savings Plan
Proposal to extend the temporary program whereby a qualifying family member is the plan holder of an adult individual’s RDSP where capacity of that adult individual is in question. The extension will be to the end of 2023.
If the registration of a charity is revoked, a revocation tax is imposed on the charity, based on the total net value of its assets. This tax can be reduced by making qualifying expenditures. Transfers of property to municipalities will be considered qualifying expenditures for the purposes of the revocation tax, subject to the approval on a case-by-case basis.
D. Tax Credit for Flow-Through Share Investors
The budget proposes to extend eligibility for the mineral exploration tax credit for an additional year. As a result, the credit will apply to flow-through share agreements entered into on or before March 31, 2019.
For a complete review of the proposed changes feel free to consult https://www.budget.gc.ca/2018/docs/plan/toc-tdm-en.html
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