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. After finding that the trust was taxable on the interest income, CRA stated respecting the trust’s reporting requirements:
The general requirement for a trust to file a return is provided for in paragraph 150(1)(c) … and [Reg.] 204 … . However, subsection 150(1.1) … provides that the trust is required to file an income tax return pursuant to paragraph 150(1)(c) if tax is payable by the trust … . Furthermore, subsection 204(1) … provides that every person having control of or receiving income, gains or profits in a fiduciary capacity must file a return. Therefore, a T3 return is required to be filed by the trustees of a trust where they have control of or are in receipt of income, gains or profits of the trust.