The Canada Revenue Agency (“CRA”) is stepping up its scrutiny of trusts in Canada by increasing its collection of information regarding beneficial ownership. Trustees and their advisors need to be prepared to respond to the new compliance and reporting obligations.  Likewise, financial institutions are also requiring more information from trustees before opening a trust bank account and dealing with trustees as the bona fide decision-makers of the trust.  In light of these new compliance and reporting measures, clients need to be more vigilant than ever regarding the settlement and ongoing activities of a trust.

New Trust Reporting Rules

Currently, a trust is only required to file a T3 Trust Income Tax and Information Return (a “T3 Return”) for a given year if it has tax payable or if it distributes all or part of its income or capital to its beneficiaries.  However, effective the 2021 taxation year and for years subsequent, non-resident trusts required to file a T3 Return and certain express Canadian-resident trusts will be required to file additional information annually, and as such certain trusts will have to file a T3 Return where currently they do not.

For taxation years ending on or after December 31, 2021, non-resident trusts that file a T3 Return and all Canadian-resident trusts will be required to report the identity of the following individuals:

  • settlors;
  • trustees;
  • beneficiaries; and
  • anyone who has the ability to exert control over the trust or override the trustee’s decisions regarding the appointment of income or capital (such as a protector).

Specific information for each settlor, trustee, beneficiary, and protector includes their

  • name,
  • address,
  • date of birth (if an individual),
  • jurisdiction of residence, and
  • taxpayer number. The taxpayer number includes a social insurance number (if an individual), a business number (if a corporation), and a CRA account number issued to a trust in Canada, or similar account number issued in the jurisdiction in which the trust is resident.

The new information will be filed in a new schedule to the T3 Return, the form of which has not yet been released by the CRA.

There are exceptions: mutual fund trusts, segregated funds and master trusts, trusts governed by registered plans (i.e., RRSPs, RRIFs, RDSPs, RESPs, TFSAs,  deferred profit sharing plans, pooled registered pension plans, etc.), lawyers’ general trust accounts, graduated rate estates and qualified disability trusts, trusts that qualify as non-profit organizations or registered charities, trusts in existence for less than three months, and trusts that hold less than $50,000 in assets throughout the taxation year if their holdings are confined to deposits, government debt obligations and listed securities.

The penalty for failing to file a T3 Return or the new schedule is $25 per day, with a minimum penalty of $100 and a maximum of $2,500. If the failure to file is made knowingly or due to gross negligence, a further penalty equal to 5% of the maximum value of the trust property held by the trust during the year will apply. Further still, late-filing and non-filing penalties with respect to the T3 Return will continue to apply, which can include a penalty of up to $25,000 or a fine and imprisonment.

Reporting to Financial Institutions

Financial institutions have also stepped up their know-your-client compliance, which includes changes to customer identification procedures and risk-management strategies. As a result, they too are requiring an increasing amount of information in relation to trusts. In the past, the financial institution would request names and addresses of trustees and a statement that the trust is properly constituted.  Now, however, some financial institutions are requiring additional information, such as residence and social insurance numbers of the beneficiaries.

Going Forward

In light of the new reporting and compliance measures, clients need to be more vigilant than ever regarding the settlement and ongoing activities of their trusts.

Setting up your trust for success

First, ensure the trust is properly constituted.  Your legal counsel should be able to explain the role of the settlor, trustees and beneficiaries, and confirm that the trust has been settled in accordance with trust laws and the desired provisions of the Income Tax Act.

Second, have a plan for safekeeping of the trust settlement property. The trust settlement property is often a gold coin or a note of currency such as a Canadian $20 bill.  Over time, the trust settlement property is often misplaced, and this may present a problem if you are ever asked to provide evidence of proper settlement of the trust.

Third, order a trust minute book. The trustees should ensure proper safekeeping of trust information and activities such as annual filings, trustee resolutions, and the trustee register.  A trust minute book is the perfect solution. It may also serve as a place to store the trust settlement property or a copy of it with information as to the whereabouts of the original.

Ongoing trust compliance

Once your trust has been properly settled and you have a place for safekeeping of documents and decisions, consider the ongoing trust compliance and reporting obligations, how they will be met, and by whom.

The trustees are responsible for the activities of the trust. It is important that the trustees understand their role as fiduciaries and the steps required to meet their fiduciary obligations. Trustees who have never acted in this capacity before should be educated about their duties and responsibilities.

It may be helpful to have a professional advisor walk the trustees through the first couple of years of trust compliance. This will include documenting loans and acquisitions of property to ensure that these actions are structured in such a way as to avoid triggering the tax attribution rules, drafting trustee resolutions regarding income and capital distributions, advice regarding reporting and filing requirements, and hosting and minuting annual trustee meetings.

Conclusion

Gone are the days when a person can settle a trust and then forget about it until some future time when the trust property is rolled out to one or more capital beneficiaries. The move towards heightened disclosure, accountability and transparency is here to stay, and trustees are getting organized and ready to meet these obligations.

If you are not sure whether your family trust can withstand CRA scrutiny or increased financial institution compliance, ask for a review by a professional. If there is a fix required, it is possible that it can be done now.