CRA finds that a class-action settlement fund was required to file T3 returns

Settlement funds received by a law firm from the defendant in a class action suit are held in a settlement trust, to be applied solely for compensating class members after approval of the terms of the settlement by final Court order. In the meantime, a T5 slip is issued annually to the “law firm in trust” respecting interest earned on these funds.

CRA found that the trust was not exempt from tax on the interest income under s. 149(1)(w), which requires inter alia that the trust in question is “established as required under the laws of Canada or of a province,” stating that this was to be contrasted with the situation where the trust is set up “pursuant to a court decision facilitating the administration of the law.” It also indicated that the trustees of the trust were required to file T3 returns on the basis inter alia of s. 150(1.1), which requires the trust to file returns if tax is payable by it.

IT-129R (archived) (see also 9238487) states:

Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined.

It is unclear whether CRA did not mention this position only because the waivers requirement could not be satisfied, or because this position may have vanished due to a changed landscape including the enactment of s. 150(1.1). In any event, the answer given by CRA is much better than being required to issue T3 slips to hundreds or thousands of class members.

Neal Armstrong. Summaries of 28 June 2017 External T.I. 2017-0705431E5 under s. 149(1)(w) and s. 150(1.1)(b)(i).