Filing Taxes for a Family Trust

Under Canadian tax laws, a family trust is a personal trust and must adhere to the regulations regarding personal trusts. There are two basic types of personal trusts: a testamentary trust and an inter vivos trust. A testamentary trust is one created in the terms of a will and comes into existence upon the death of the testator (the will’s creator). An inter vivos trust is one that a living person creates for the benefit of other living people.

When filing taxes for a family trust, think of the trust as an individual taxpayer, and gather the proper paperwork. Documents needed include any that show income the trust received and expenditures the trust paid.

Tax form packages for a trust are the T3 Trust Income Tax and Information Return, colloquially called the “T3 return,” while the package of forms used to file taxes for a family trust depends on the province or territory of the trust’s residence.

Basic Information Needed

The information you’ll need to complete the trust’s tax return includes the date the trust was created. If this is the first year the trust is filing taxes, a copy of the original trust document or the will creating the trust must be attached to the tax forms. If the trust distributed payments or property to beneficiaries during the prior tax year, you need documents verifying these distributions. This can include bank statements or deed transfers, among other documents.

Reporting Income

Claude Ayache, CPA, CMA, a senior tax specialist with Keats, Connelly and Associates, states concerning filing taxes for a family trust, “The important thing is to report all income from all sources on the tax return.” Types of income can range from farming, fishing and rental income to capital gains. Any investment income the trust earned is reported. For example, dividends from a corporation are considered investment income. Earnings on savings are also investment income. If the trust owns interest in a business enterprise, a copy of the company’s financial statements can help with filing the trust’s taxes. “The trust is not limited on what type of business it can own. It can own any type as long as it’s a legitimate business and the income is reported on the trust’s tax return,” Ayache says. Amounts that reduce the trust’s income include things like payments to beneficiaries and trustees’ fees. Business losses need also be considered, as these can reduce taxable income.

Situations That Affect Filing

If the estate of a deceased individual is distributed to beneficiaries immediately upon death, filing taxes on behalf of the trust may not be necessary. Each beneficiary becomes responsible for his or her portion of the estate distribution. In addition, if the family trust is a new testamentary trust, interest income earned prior to the testator’s death is reported on the deceased’s final return for the tax year. The trust is only liable for the portion earned after the testator’s death in the tax year for which you are filing.

During the tax year for which you are filing, if the trust distributes property to a beneficiary, a statement containing basic information about the distribution is attached to the return. Information needed includes a description of the property, the name and address of the beneficiary who received the property, and the fair market value and cost amount on the day the property was distributed.

References & Resources

• Canada Revenue Agency: When to File Your T3 Return
• Canada Revenue Agency: Who Should File a T3 Return
• Claude Ayache, CPA, CMA; Keats, Connelly & Associates; Phoenix, Arizona