In the 2018 Federal Budget, the federal government proposed to increase reporting requirements for trusts and impose penalties for failing to comply. Later that year, the Ministry of Finance released draft tax legislation on the new trust reporting requirements. Fast-forward to 2021 when the proposed amendments to the Income Tax Act (Canada) were intended to take effect, and they still have not yet been enacted. It is possible that the draft legislation could be passed in the future with the amendments to take effect for taxation years ending on or after December 31, 2021, so it is important to be aware of the proposed new trust reporting requirements and the potential penalties for non-compliance. For information on these, see my colleague, Nicole Woodward’s article, New trust reporting rules and ongoing trust compliance.
The proposed new requirements would be cumbersome on trustees of Canadian-resident express trusts (with some exceptions) and trustees of non-resident trusts that file a T3 Return, as the trustees would be required to report extensive information on the settlor, trustees, beneficiaries, and controlling persons (i.e., protectors) of those trusts. The specific information for each settlor, trustee, beneficiary and protector includes their name, address, date of birth (if an individual), jurisdiction of residence, and taxpayer identification number. The taxpayer identification number includes an individual’s social insurance number, a corporation’s business number, 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.
Furthermore, if the amendments are passed into law, information about beneficiaries of trusts that was intended to be kept private will become public. If there are beneficiaries of a trust that are not aware that they are beneficiaries, obtaining their social insurance numbers may raise questions. Collecting the required identification information of beneficiaries may also prove challenging where there are beneficiaries whose identity is not known or ascertainable. In this case, trustees would need to make reasonable efforts to obtain the information, but where this cannot be done, trustees must provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.
In addition, we may experience the resignation of trustees, where the trustees do not wish to be the subject of such disclosure requirements. If you are the trustee of a trust that no longer serves a useful purpose and/or has little or no activity, you may consider terminating the trust altogether to avoid having to file a T3 Return and the additional information identified above on an ongoing annual basis.
While a trust is still a useful planning tool, these cumbersome reporting and disclosure requirements may make settlors and testators think twice before setting one up.
We know the government’s intent with proposing the new trust reporting requirements was to enhance the collection of ownership information relating to trusts and to reduce the potential for taxpayers to engage in aggressive tax avoidance and tax evasion activities using trusts. Miller Thomson’s Private Client Services Group continues to stay apprised of the latest legislation and will provide an update when there is legislation passed to enact these requirements. In the meantime, if you have a trust in place and wish to consider how these reporting requirements may impact your trust, please contact a member of Miller Thomson’s Private Client Services Group.