On July 27, 2018, Finance Canada released Legislative Proposals, and Explanatory Notes relating to those Legislative Proposals that deal with, among other topics, the Reporting Requirements for Trusts as announced in Budget 2018.
The Budget proposals were released under the heading of “Cracking Down on Tax Evasion and Combatting Tax Avoidance.” They proposed a series of increased filing and reporting requirements applicable to most trusts, including both Canadian-resident trusts and non-resident trusts. The new measures were intended to give taxation authorities sufficient information to determine taxpayers’ tax liabilities and to effectively counter aggressive tax avoidance, tax evasion, money laundering and other criminal activities. These steps were taken to advance the OECD’s common reporting standards (CRS), which were implemented under Part XIX of the Income Tax Act of Canada (the “Act”) that took effect July 1, 2017. Part XIX enacts new subsection 270(1), which adds a number of new definitions to the Act, including for TIN, or “taxpayer identification number”. The TIN is defined as the number used by CRA to identify an individual or entity, including a social insurance number, business number or trust number; and in respect of a jurisdiction other than Canada, is the number used in that jurisdiction to identify an individual or entity.
Existing paragraph 150(1)(c) of the Act imposes an obligation on trusts and estates to file a T3 income tax return within 90 days of the end of each of their taxation years. The CRA’s T3 Guide states that a return is required only if the trust: (i) has any tax payable; (ii) has a taxable capital gain; (iii) has total income of more than $500; (iv) has a benefit of more than $100 to any beneficiary; or (v) holds property that is subject to subsection 75(2) or is a deemed resident trust under subsection 94(3). It is generally understood by CRA that a T3 is both a return of income under paragraph 150(1)(c) and an information return under Reg. 204(1).
Under current reporting requirements, the CRA collects information in respect of trusts through the initial application for a trust number and through the filing of both T3 information slips and T3 trust returns. Other reporting requirements arise in respect of foreign income and property. In particular, under current requirements, at least the following information must be reported:
- a copy of the trust document or will;
- the name of the trust;
- the residence of the trust;
- the mailing address of the trust;
- the trust identification number;
- the name, address and “recipient identification number” (SIN, BN or trust account number) for all resident beneficiaries to whom the trust allocated income in the year; and
- the name, address and foreign tax identification number for all non-resident beneficiaries to whom allocations and designations of income are paid or payable in the year.
Note that under subsection 237(1.1) of the Act, a person is required to provide his or her social insurance number to any person who is required to make an information return that requires the number pursuant the Act or the Regulations.
Effective for trusts’ taxation years ending after December 30, 2021, the filing and reporting requirements for trusts will be expanded under the Legislative Proposals.
Under new subsection 150(1.2), the exceptions from the filing requirements set out in subsection 150(1.1) do not apply to a trust that is resident in Canada (including trusts that are deemed resident in Canada) and that is an “express trust” or, for civil law purposes, a trust other than a trust that is established by law or by judgment, unless one of the new exceptions set out in paragraphs (a) to (n) apply. These so-called “exception trusts” will not be required to file the return of income otherwise required under subsection 150(1), nor to provide the additional information set out in new Reg. 204.2 (discussed further below). As such, trusts other than the exception trusts will now be required to file a T3 trust return for every year, regardless of whether the trust has tax payable or distributes a portion of its income.
The exception trusts now include:
- trusts that have been in existence for less than three months;
- trusts that hold assets with a total fair market value of less than $50,000;
- lawyers’ and other professionals’ mixed-client trust accounts;
- non-profits or registered charities;
- mutual funds, segregated funds and master trusts;
- graduated rate estates;
- qualified disability trusts;
- employee life and health trusts;
- certain government funded trusts;
- pension plans, registered savings plans and the like; and
- cemetery care trusts and funeral arrangement trusts.
In addition to the enhanced filing requirements, new subsections 163(5) and (6) impose penalties on persons who are subject to the filing requirement and who fail to file or who make a false statement in the return. The penalties arising out of those offences will be the greater of $2,500 and 5% of the highest fair market value of the property held by the trust during the year.
New section 204.2 is added to the Regulations under the Act and imposes additional reporting requirements in respect of trusts. These requirements are imposed on every person having the control of, or receiving income, gains or profits in a fiduciary (or analogous) capacity in respect of a trust that is required to file a T3 return. Note that this includes both a formally appointed trustee and any person acting in the capacity of a trustee (such as a trustee de son tort).
The additional information requirements contained in new subsection 204.2(1) include the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and TIN for each person who, in the year:
(a) is a settlor, trustee or beneficiary of the trust;
(b) has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust (eg., a trust “protector”).
New subsection 204.2(2) provides that the requirement to provide information in respect of beneficiaries applies:
(a) to each beneficiary of the trust whose identity is known or ascertainable with reasonable effort; and
(b) to beneficiaries whose identity is not known or ascertainable, if sufficiently detailed information is provided to determine with certainty whether any particular person is a beneficiary of the trust.
Several comments can be made in respect of these requirements. First, the filer’s obligation is to use “reasonable effort” to obtain the required information, including the TIN, in respect of ascertained beneficiaries. This is similar to the requirement imposed on information slip preparers under subsection 237(2) of the Act. Information Circular IC 82-2R2 (Nov. 20, 1992) suggests that information slip preparers should keep any documents they need to prove they made reasonable efforts to obtain a person’s SIN, for example, a record of the date of request, an example of the request form and the names of the people contacted. And if the person does not respond to the SIN request the preparer should not delay in filing the information returns after they are due.
Second, the expanded filing requirements are imposed on the trustees (or persons acting in the capacity of trustees) who may or may not have been provided with detailed information at the time of their appointment. Consider, for example, the trustee of a trust created under a will, the beneficiaries of which include the deceased’s nieces, nephews and remoter relations; or a trustee under an inter vivos trust, the class of beneficiaries of which includes named individuals of whom the trustee has no knowledge, or a class of beneficiaries where the members of the class are undetermined. In many cases beneficiaries may be named or described in a less-than-complete manner, including a lack of proper legal names. The information-gathering requirements for filers will be greatly increased.
Third, it is not clear whether a replacement trustee who assumes the office of trustee long after the trust was settled is or may be liable for any and all reporting deficiencies of his or her predecessor trustees.
Fourth, a trust protector will often be given powers to appoint replacement trustees but not the power to appoint the income or capital of the trust. In that case, there is no obligation to report or identify that individual – a potential deficiency in the transparency objective of the new requirements. And, so long as that person has and exercises no fiduciary capacity, that person will not be subject to the filing requirements.
Fifth, the Explanatory Notes to the Legislative Proposals suggest that, in respect of unknown or unascertained beneficiaries, the requirements of paragraph 204.1(2)(b) are met if the details of the terms of the trust that extend the class of beneficiaries to include those unascertained persons is provided. In turn, this suggests the act of filing a copy of the trust document or will meets the requirements. However, will this enable a trustee, or CRA, in all cases to “determine with certainty whether any particular person is a beneficiary of the trust?” Suppose, for example, that the class of beneficiaries includes the spouse, or future spouse, of a particular person. How is the trustee to determine with certainty that any person is or is not an unascertained beneficiary of that trust, because conceivably any person living or yet to be born is potentially the spouse of the particular person. The drafting of the provision creates uncertain obligations.
How will the new reporting requirements affect existing and future trusts and trustees? The expanded reporting requirements may have the effect of creating a “chill” on persons who might be asked to act as a settlor or a protector for trusts. Even though CRA’s existing collection practices include a requirement to file a copy of the trust document, the fact that this information is now being collated, cross-referenced, data-mined and potentially shared with foreign tax agencies will create privacy concerns and may actively discourage individuals from agreeing to fill these roles. Also, while trustees are already required to report substantially the same information in respect of beneficiaries to whom distributions and allocations are made, the new and expanded requirements relating to all beneficiaries, ascertained and unascertained, will certainly make it more difficult for trustees to comply with their obligations. And in this same respect, in the case of discretionary trusts, trustees will need to report information concerning all persons who may be beneficially entitled under a trust, regardless of whether that person ever obtains any benefit from the trust.
The new requirements will permit CRA to broaden significantly the data they maintain in respect of taxpayers, especially when that data can be cross-referenced through the use of TINs. Will CRA, for example, use this information to expand their analysis of potentially associated corporation through the look-through provisions of subparagraph 256(1.2)(f)(ii)? Or will they, as announced, confine their analysis to rooting out instances of aggressive tax avoidance, tax evasion, money laundering and other criminal activities? Certainly, the trend towards defining broadly a class of discretionary beneficiaries may no longer be advisable. Although settlors and their advisors may prefer the flexibility of including a broad class of beneficiaries, consideration should be given to whether trustees will be able to meet their reporting obligations in respect of all such individuals and whether all such individuals will be compliant in providing the required information.