Breaking Down the Types of Trusts Available in Canada When filing a T3 trust return, it is important to know about the types of trusts available and the conditions of each. Some trusts may not require a T3 return and others may have specific criterias in order to qualify for special considerations. Continue reading to find out about different types of trusts you may come across while living in Canada. The Graduated Rate Estate (GRE) as Types of Trusts This is the estate that arises after the death of an individual. To qualify as a GRE, no more than 36 months can be passed since the individual’s death. Once the 36 months have passed, the estate will not be considered a graduated rate estate. Additionally, the trust must be a testamentary trust within these 36 months. The trust must meet all the conditions listed above in order to qualify as a graduated rate estate. Spousal or Common-Law Partner Trust A spousal or common-law partner trust includes a testamentary trust and an inter vivos trust. This ensures that the living beneficiary spouse or common-law partner is entitled to all the income that may arise during the lifetime of their spouse or partner. This spouse or partner is the only person who can receive or use any income or capital of the trust during their lifetime. Personal Trusts Personal trusts are either a graduated rate esetate or a trust that has no beneficial interest acquired for consideration. This consideration would be payable directly or even indirectly to the trust or a person or partnership that made a contribution to the trust by transferring, assigning or disposing a property. Since 2016, only graduated rate estates are automatically qualified as personal trusts without considering the circumstances in which the beneficial interest in the trust was acquired. Communal Organizations as Types of Trusts If the following conditions are met, then it is deemed to be a trust: There are members who live and work together. They follow practices, beliefs and operate per the principles of the religious organization it is part of. Members are not permitted to own property in their own right. Members are required to devote their working lives to the congregational activities. Conducts one or more businesses directly or owns all the shares of the capital stock of a corporation. Alternatively every interest is in a trust or other person that carries on the business in supporting or sustaining its members or those of another congregation. This communal organization would pay tax as if it is an inter vivos trust but can also allocate its income to the beneficaries of the trust instead. Employee Trust This is a trust that is established under which an employer makes payments to a trustee in trust only for the benefit of its employees. The trustee needs to ensure the arrangement qualifies as a trust on the first T3 return and the employer can deduct contributions to the plan if it is filed less than 90 days after the end of its first tax year. In order to maintain its status as an employee trust, the trust has to allocate all non-business income and employer contributions for that year each year. Regardless, business income cannot be allocated and will be taxed in the trust. An employee trust has to file a T3 return if the plan or trust has tax payable, has a taxable gain or has disposed of capital property. If you’d like to know more about the types of trusts, visit the CRA’s website and read into the section regarding their T3 Trust Guide by clicking here.
Category Archives: Business
Breaking Down the Types of Corporations within Canada When filing corporate taxes and applying for grants, certain rates and deductions, it is important to have an understanding of the types of corporations that they apply to. These types have certain implications for tax purposes and business owners need to report on it. Changing your corporation type also comes with tax implications and each point of the year as well. Canadian-Controlled Private Corporations (CCPC) These corporations meeting a set of criteria at the end of a tax year and will be eligible to certain tax rates and deductions. To start off, it must be a private corporation and is resident in Canada. The incorporation must be completed in Canada and can’t be controlled by one or more non-residents. Additionally, it can’t be controlled by a public corporation unelss it is a prescribed venture capital corporation. The shares can’t be listed on a stock exchange outside of Canada or within. Other Private Corporations To be considered a private corporation in Canada, the business must meet the following criteria at the end of the tax year: Resident in Canada Not a Public Corporations Not Controlled by One or More Public Corporations Prescribed Venture Capital Corporation is the Exception to this Can’t be Controlled by federal Crown Corporations Types of Corporations: Public Corporation Public corporations in Canada require them to be resident and must meet one of the two following requirements at the end of the tax year. First of all, it must have a class of shares listed on a Canadian stock exchange. Alternatively, it can elect or be designated by the minister of National Revenue to be a public corporation and has complied with regulations on the number of shareholders, the dispersing of the ownership and public trading of shares, and the size of the corporations meets the requirement. If the corporation complies to Canadian regulations in a certain format, it can still be elected or designated by the minister of National revenue to not be a public corporation. Corporations Controlled by a Public Corporation are ones that are public but are subsidiaries of current Canadian public corporation. This does not mean it will qualify as a public corporation for T2 tax returns and additional details are required on a case by case basis. Other Corporations do not meet any of the criteria above and include general insurers and Crown corporations. To find out more, visit the CRA’s website and read the section posted on Canadian corporations at the link here: Types of Canadian Corporations According to the CRA
Breaking Down the Business Transaction Records Needed for Your Future Tax Filing as per the CRA According to Canadian tax law, you are required to keep transaction records for any claims regarding income and expenses. Any proof of transaction may be required and include accounts, agreements,books, invoices, letters, memos, returns, statements, vouchers and other information. The simplest way to stay ahead of this requirement is to keep track of income and expenses daily. This is expected of every business to adapt an appropriate bookkeeping and recording system. Maintaining bank information including deposit slips, bank statements and cheques is required as well. Keeping a digital track of your records may prove to be effective, but make sure they are clear enough for the CRA. Income Records Keeping track of your business’ gross income earned is extremely important. This is your total income before deducting any expenses and must include the date, amount and source of income. Tracking the income is required regardless of whether it is through cash, property or services. Each transaction should have the original documents maintained. Types of Transaction Records Needed for Income Sales Invoices Cash Register Tapes Receipts Bank Deposit Slips Fee Statements Contracts If you are a involved in a farming business, this would include: Purchase Tickets from Sales of Grain Cheque Stubs from Marketing Boards For fishers, original documents include: Sales Slips for Landings Trip Settlement Sheets Slips/Records of Sale to Customers Expense Records For every purchase, make sure you keep the receipts or vouchers and they should show: Date of Purchase Name of Seller or Supplier Address of Seller or Supplier Name of Buyer Address of Buyer Full Description of the Goods or Services If there is no description of the goods or services such as on a cash register tape, write a description of the goods and or services instead. Vendor’s Business Number (if applicable) If you did not receive a receipt, note down the name, address, amount paid and the date of the payment in your own records. Property Transaction Records Keep detailed records of any properties that you’ve bought and sold. These records must show who sold you the property, the cost and the date of purchase. Use this information to calculate the your capital cost allowance among other amounts. For a sale or trade of a property, record the date you sold or traded it and the amount of payment or credit from the sale or trade-in. For more information on this topic, visit the CRA’s page on Keeping Records here.
Updates to the CRA’s Digital Services This year has brought many updates to the CRA’s Digital Services which include new options for T3 trust returns and T1 adjustments. Over the last few years, there has been an increasing need for digital access to tax information and the COVID-19 pandemic sped that process up significantly.It has been developed by senior CRA officials, tax preparers, tax software developers and other key stakeholders. This modernization has made it much more accessible for taxpayers to access vital information on demand. Access CRA’s E-Services by clicking here at your convenience. T1 Adjustments in CRA’s Digital Services Taxpayers have already been using the EFILE and NETFILE services to file returns but now T1 returns can also be adjusted online and have their information updated or corrected. This speeds up the process from eight weeks by paper to around two weeks electronically. Submitting documents through this method will also become significantly simpler in the coming years as well. Viewing T2 Notices Business owners and their representatives using certified tax preparation software are now able to view corporate T2 notices via the Auto-fill my return feature. New updates of these softwares will continue to include this ability and will display a corporation’s recent notices including Notices of Reassessment for specific tax years. Changes to Confirming a Representative The CRA’s digital service was recently changed to require client’s to confirm or deny requests for client authorization within the MyBA portal. The representative needs to submit the signature page of a new client authorization through RAC and stays pending until the client confirms it. This added level of security ensures security for clients using services of any tax preparer. Tax Accounts, Payments and Balance Updates More detailed views on individual transactions that make up assessments and reassessments. More details about transferred payments that include period-end and business numbers. Added a new column that clarifies whether a transaction is a credit or debit to an account. Restoration of transaction table entries for previous, interim and closing balances. Allowed access to closed accounts in MyBA to previous activities and balances. Electronic Notices of Assessment Most notices of assessment are being accessed electronically through the Canada Revenue Agency’s digital services but there will be changes in the future. Security is a major concern as always but it is a strong goal of the CRA to reduce the number of paper notices of assessments that are being sent out. The New T3 Trust Return Process With the newest updates announced this year to trust returns, there will be a greater need to submit information to the CRA. This update includes the addition of rules requiring certain types of trusts to have to report beneficial ownership information for future tax years, including 2022. The digital CRA system already allows taxpayers to register for trust accounts but now also allows electronic filing options too. Future updates will include beneficial ownership information forms, T3A forms, allowing trustees and authorized representatives to view and update trust information online, enabling the authorization of trust representatives online and make sure the process is simple and accessible to all. Find out more information on CRA’s Digital Services through the Canadian CPA website here: Find Out More in CPA Canada’s Article on CRA’s Digital Services
Small & Medium Business Audits With the changes to our economy from the COVID-19 pandemic, parties involved with the subsidies that were provided may be susceptible to audits, on top of the regular risk-assessment system from the CRA. The risk-assessment system analyzes tax returns and subsidy claims to judge whether they are at a high risk of being non-compliant. If there are a lot of errors or signals of non-compliance, these returns and claims will be flagged and the CRA will initialize the process for business audits. Make sure your tax return or subsidy claims are as accurate as possible to avoid being chosen for an audit. The Audit Process If you are selected for an audit, an auditor from the CRA will get in touch with you to start the audit process through mail or a phone call. You will be informed exactly which time periods are being audited and how to provide the relevant documents. Audits are currently virtual and require you to send any relevant documents electronically to the auditor. They will provide the instructions on how to do so and will review the submitted documentation. After reviewing the documents, the auditor will let you know if there are any adjustments. They will issue a proposal letter that includes the adjustments and you have 30 days to review them and provide representations, then the audit will be finalized. In this time, you can communicate the auditor and provide resolutions. After 30 days from the proposal has been completed, a final letter will be sent over with the results of the audit. This letter will notify you of one of the following results. No adjustments will be made to the previous assessment or subsidy claims. An adjustment will be made that means you will owe more tax from the reassessment. You will have to pay the balance. If it was done on a subsidy claim, a notice of redetermination will be issued and adjusts your claim. There can also be an adjustment that results in less tax being owed via reassessment and you will be eligible for a refund. Please note that auditors can make copies of your records and online document submission will be done via the CRA’s secure services. What the CRA Looks for in Business Audits The CRA and its auditors examine your business’ books, records, documents and information. This primarily includes: Business Records like ledgers, journals, payroll records, invoices, receipts, contracts and bank statements. Personal Records of the business owner such as bank statements for personal accounts, mortgage documents and credit card statements. Personal or Business Records of any other individuals or entities that are related to the business owner. This includes a spouse, family member, corporation, partnership or a trust. Disputing the Result of a Business Audit If you don’t agree with the CRA’s assessment or reassessment, you may object. If you do so, the additional taxes owed will not be due until the objection is resolved. You may also file a complaint on the service from the CRA. To find out more information on how business audits are conducted in Canada along with relevant links to important audit resources, visit the CRA’s webpage on Small and Medium Business Audits by clicking the link below. Click Here to Access the CRA’s Business Audit Resources