Preparing for the New Trust Reporting Rules - applicable to tax years ending after December 30, 2021
Trustees should be aware of anticipated changes to the trust reporting regime in Canada. Once enacted, trustees of certain trusts should expect to be subject to heightened disclosure rules regarding beneficial ownership in the trust with respect to tax years ending after December 30, 2021. These rules will apply to most express trusts that are resident in Canada, as well as non-resident trusts that are currently required to file a T3 return. Proposed in the 2018 Federal Budget and confirmed in the 2019 Budget, these new trust reporting rules reflect the global trend toward increasing transparency of beneficial ownership, and are intended to assist the CRA in assessing tax liabilities of trusts and beneficiaries.
1. What Trusts Are Subject to the New Trust Reporting Rules?
The new rules apply to express trusts resident in Canada and non-resident trusts that are already required to file a T3, with limited exceptions. Express trusts are trusts which are intentionally created by the settlor, and are usually established by a written document, such as a trust agreement, or by a will. Accordingly, most family trusts, spousal trusts, cottage trusts, as well as testamentary trusts will be subject to these new disclosure rules.
Certain trusts are excluded from the new reporting rules, among which are several having particular relevance to the area of estate planning:
- Graduated rate estates (generally, an estate that has been in existence for less than 3 years);
- Qualified disability trusts;
- Trusts that qualify as registered charities (which would include private foundations);
- Trusts that hold certain types of assets, not exceeding $50,000 in value; and
- Trusts that have been in existence for less than three months at the end of the year.
Trusts which fall under the limited list of exceptions will continue to be subject to the disclosure rules that were applicable prior to 2021.
2. The Impact of the New Trust Reporting Rules
Prior to 2021, a trustee was generally not required to file a T3 return for a trust if it did not earn income or make any distributions in the year. Where the new rules apply, however, trustees will be required to file a T3 return even where no income was earned or no distributions were made.
These rules therefore significantly impact trusts that do not hold income-generating property. For example, trusts established to hold cottages or vacation properties, as well as trusts established in the course of an estate freeze, many of which do not earn income or make distributions in the year and have not previously filed a T3, will be required to file in 2022.
Starting in 2021, for trusts required to file a T3 return either under the old rules or under the new rules, the trustees will need to make additional disclosures that were not previously required. In 2020 and prior years, trustees did not need to provide information on the identity of the beneficiaries. However, the new rules will now require identification information with respect to the trustees, beneficiaries, settlor, and any person who has the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust (such as a protector). Such information will include the following:
- Date of birth
- Jurisdiction of residence, and
- Tax identification number (such as the SIN, business number, or account number given to a trust).
3. Penalties for Failure to Comply
Failure to comply with the new trust reporting requirements may result in harsh penalties. Prior to 2021, trustees who failed to file a trust return were liable to a penalty of the greater of either: (i) $100, or (ii) $25 per day of non-compliance for up to a maximum of $2,500.
Under the new rules, an additional penalty will address false statements or omissions on a T3 return. Where the failure to file or provide accurate information was done knowingly or as a result of gross negligence, a significantly higher penalty could apply at the greater of either (i) $2,500, or (ii) 5% of the highest value of the trust property held during that year, with no maximum penalty amount.
4. Preparing for the New Trust Reporting Rules
While the first T3 return for an affected trust will not be filed under these new rules until early 2022, trustees should take the upcoming year to collect the information needed to comply. The new rules require information on all beneficiaries, including those with contingent interests, which means that trustees will need to carefully determine all of the beneficiaries who are known or ascertainable with reasonable effort. Certain beneficiaries may not be known, such as where a trust provides for a class of beneficiaries that includes any children or grandchildren the settlor may have in the future. In these cases, the trustees will need to provide sufficiently detailed information to determine with certainty whether a particular person is a beneficiary of the trust.
Individuals considering establishing a trust may wish to reassess whether it is still an appropriate vehicle for their estate planning goals. Additionally, existing trustees should be reviewing the trust terms and considering whether any steps are warranted in light of these changes. It might, for instance, be an appropriate time to wind-up a trust that no longer serves its purpose.
Consulting with a qualified estate planning professional can help you understand the impact of these new rules on your existing or proposed estate plan, and determine how best to navigate the new trust reporting requirements.