2009 T3 Trust Tax Returns
We are writing to remind you that it will soon be time to file your family trust tax return for 2009. All family trusts must report their income and disbursement activity for the 2009 calendar year by no later than March 31, 2010.
This deadline is applicable to all family trusts, and there are penalties for failing to file on time.
Family trusts generally own either shares of private corporations, or units in limited partnerships.
For trusts which hold private corporation shares, the practical deadline is actually much earlier: March 1, 2010. This is because corporations must report any dividends paid on such shares on T5 slips, and these T5s must be filed by the end of February. Quite often, the cash flow through the trusts "drives" the quantum of dividends that the corporation has to report, and there is sometimes a bit of bookkeeping involved.
For trusts which hold limit partnership units, there is no earlier deadline, since the limited partnerships do not have to report their income allocations until the end of March of each year (on T5013 information slips), but you can appreciate that if they issue those T5013s rather close to the March deadline, it can be a scramble to get the trust return completed and filed on time. Late T5013s are usually the biggest reason for holdups as we approach the March deadline.
In addition to all this, in February and March we will have to contend with traffic tie-ups, together and courier delays, caused by the Olympic Games.
With a deadline this tight, we need your help!
To get so much done in such a short period of time, everything you can do to streamline the process would be very helpful. Specifically, we ask that you please summarize the following for us:
The amount of cash paid into the trust for each month of calendar 2009, and
The amount of cash paid out from the trust to each of the beneficiaries for those months.
With respect to payments to third parties (for the benefit of certain named beneficiaries), Lohn Caulder has recommended for years that all trusts should pass cash disbursements destined for individuals directly through to beneficiaries, who should be maintaining their own bank accounts. Disbursement of monies to various third parties (credit card bills, schools, etc.) would be made from those "second tier" bank accounts, and therefore would not clutter the banking records of the family trust itself.
The principle here is that trusts should make disbursements directly to named beneficiaries, wherever possible or practical. This avoids unnecessary complexity in gathering information for preparing the return, and greatly simplifies the records of the trust. This is of great benefit should CRA seek to review the trust's transactions. Note that CRA has recently increased its audit activity with respect to trusts - see attached addendum.
To get everything done in time, and to keep your accounting fees to a minimum, we would greatly appreciate your assistance in summarizing the transactions as described above. To assist you in reporting these transactions to us, we have enclosed two transactions summary forms, one "filled in" with sample data, and a blank one for you to fill in and send back to us.
To download the blank Excel form click here. For the "filled in" sample Excel form click here.
To download a PDF of the blank form click here. For a "filled in" sample PDF form click here.
For those of you with the "Excel" spreadsheet program, you will find that these forms are "live", meaning that you can enter data, and the sums will automatically be done for you. Note: Please remember to save the form to keep from losing your data.
You can complete the forms, and return them to us by return email. Please send them to aleong@lohncaulder.com. Or if you prefer, the completed forms can also be mailed to our office, or faxed to 604-688-7228.
What we will do...
We will compare your summary to the carry forward information in your corporate records and will optimize the allocation of the income of the trust into one of two categories:
New 2009 calendar dividends, and, if applicable,
Tax-free distribution of capital from previous years.
What if You Didn't ... or Can't?
If you are unable to prepare the summary as attached, please send us your January-to-December 2009 trust bank statements and cancelled cheques, so that we can prepare the summary for you. For these situations, it will also be necessary to identify for us the particular beneficiary for whom a payment to a third party was made.
Does your trust need updating?
The tax environment in which family trusts operate has changed significantly in the past few years. Trusts have evolved into general conduits of cash to a wide variety of beneficiaries, not just children (for whom the "kiddie tax" has proven an effective disincentive, if the children have not yet turned 18 at any time in 2009). The "flexible beneficiary" power granted to trustees in most modern trusts permit income to be allocated to the business owner, his or her spouse, holding companies for investment purposes, or even aged parents. If your trust is older than 10 or 11 years, it may not have such flexibility. Feel free to contact us to discuss your options.
Thank you in advance for your help!
Special Notice (January 2010)
We have been advised from usually reliable sources that CRA plans to increase its audit activity over family trust transactions. This is remarkable perhaps only for the incredibly long time it has taken for CRA to get around to this. To our knowledge, trusts have been largely ignored by CRA since they first appeared on the scene in the mid-1980's. The CRA plans to address 3 main areas:
Has the trust issued promissory notes to beneficiaries? Promissory notes are commonly used to "pay" beneficiaries. These notes may be challenged as legally unenforceable, calling into question the allocation of income so made.
Have the trustees enjoyed a personal benefit from monies ostensibly distributed to other beneficiaries?
Are proper accounting records, trustee minutes, and the original settlement property readily available?
Proper accounting records will be essential. In particular, it will be important to have evidence of the cash funds that have transited through the trust during the year, and have good proof that the funds were indeed delivered to the beneficiaries so named. Alternatively, it will be necessary for the trustees to have appropriate resolutions delegating authority to the corporation to disburse funds on the trust's behalf, and to ratify all said transactions.
Note that the validity of a trust depends on the continued existence of the asset with which it was originally established (usually, a gold coin or silver wafer), although cash may have been used in some limited circumstances. The asset was entrusted to the trustee - it needs to still be there (hopefully, in a safety deposit box).
The whole matter underscores our long-standing recommendation that trust transactions involving beneficiaries actually involve a disbursement of funds from the trust to the particular beneficiary. Since the beneficiaries are generally nowadays legal adults (a requirement since 2000), and would be voluntary participants in the whole process, presumably their decisions as to the application of the funds so received, or the income allocated, will be their own personal affair - but perhaps we will see some effort to "pierce" this veil.
It is almost certain that many trustees have tended to short-cut the sometimes tedious cash distribution process that their share ownership structure requires. In view of this recent trend for increased audits, we strongly recommend that trustees sharpen their cash distribution practices.
Please do not hesitate to contact us if you have any questions or concerns.