Globally the push for greater transparency of beneficial ownership continues. The UK and the EU are in the lead. The UK adopted the publicly available register of persons exercising significant control of UK companies and certain partnerships, and is in the process of adopting a register of beneficial owners of UK real estate (available to the public) and is expanding the existing trust register (quasi-public availability). The EU is moving in a similar direction with beneficial owners of corporations in the 4th and 5th Anti-Money Laundering Directives, but EU members are slow to adopt a register that is available to the public.
Canada is catching up with new reporting for tax purposes of trust beneficial owners and is considering making corporate UBO registers publicly available.
New Trust Reporting Rules from 2021
From the 2021 tax (i.e., calendar) year, trust reporting to the Canada Revenue Agency ("CRA") is being expanded to improve beneficial ownership information, which will assist CRA with assessing tax liabilities for trusts and their beneficiaries. The changes mean that more trusts will have to file a T3 Trust Income Tax and Information Return (a "Trust Return") and that additional information on trust beneficial ownership will need to be provided in the return.
Most express family trusts that are resident in Canada will need to file a Trust Return from 2021. Current exceptions from having to file a return, for example, if a trust had no income and did not dispose of any property, will no longer be applicable. This will also apply to foreign trusts that are deemed resident in Canada. For some trusts, 2021 will be the first year that they need to file a return.
In addition, the information provided in the Trust Return is being expanded to include disclosure of the identity of trustees, beneficiaries, settlor(s) and any other persons who have the ability to exert influence over trustee decisions regarding the appointment of income or capital of the trust (for example, a protector). The information to be provided is the name, address, jurisdiction of residence and taxpayer identification number (or equivalent in another jurisdiction for non-residents). This obligation will apply to all trusts that are required to file a Trust Return. The first reporting for the expanded information will be on or before March 30, 2022 in respect of the 2021 taxation year.
All beneficiaries whose identity is known or ascertainable with reasonable effort must be disclosed and their information provided, even if they have never received (or may never receive) a distribution from the trust. If not all the beneficiaries are known or ascertainable then the information provided needs to be sufficiently detailed to determine with certainty whether any particular person is a beneficiary, for example, by providing the terms of the trust that describe the class of beneficiaries.
Alongside the new rules, there will be enhanced and severe penalties for failing to file a return or making a false statement or omission in a Trust Return (including errors in or incomplete beneficial ownership disclosure). If this was done knowingly or due to gross negligence, the penalty will be 5% of the value of the trust assets. Therefore, an error or omission in reporting for a $10 million trust fund could potentially result in a $500,000 penalty.
In preparation for the new rules, trustees will need to:
- If they do not already file Trust Returns, establish whether they will have a requirement to file a Trust Return for 2021 under the new rules. Trustees of foreign trusts with Canadian connections, may wish to review their residency status as most deemed resident express family trusts will be required to file a Trust Return;
- Identify the settlor and beneficiaries of the trust and check or obtain their relevant details. This may involve contacting a remote or contingent beneficiary who is unaware of their interest in the trust, which could in some cases be problematic for the trustees or for family harmony;
- Consider whether any other person has the ability to exert influence over trustee decisions regarding the appointment of income or capital and, if so, obtain their relevant details. A person's ability to exert influence might be contained in the trust deed itself or in a related document; and
- Consider what information may have already been disclosed to CRA under FATCA or the Common Reporting Standard to ensure consistency with the new information that will be provided with the Trust Return as discrepancies could be a red flag.
If clients or any person whose information will be disclosed is uncomfortable with the disclosure, it might be possible to take steps to address that. For example, a protector could resign before the end of 2020 and would not then be reportable as a person who has the ability to exert influence from 2021.
Trustees, settlors and beneficiaries should consider whether they are up to date with their tax and reporting obligations in connection with a trust. If there are any irregularities it would be advisable to rectify these proactively rather than wait for CRA to raise a query based on the enhanced information it receives under the new rules. This could include use of Canada's voluntary disclosure program.
When establishing new trusts that will be subject to these disclosure requirements thought should be given to the extent of the information that will need to be reported. This could impact, for example, how broad the class of beneficiaries should be.
Other Transparency Initiatives
Trusts are not the only area where transparency of beneficial ownership is on the agenda. We set out below further examples of how Canada is following the global drive for greater and more widely available information on ultimate ownership of assets, with links to some of Stikeman Elliott's publications on these initiatives.
- Private federally-incorporated corporations are required to establish and maintain a register of individuals with significant control. The information is retained by the company and available to law enforcement, tax and other authorities. Access to the register is also available to shareholders and creditors of the corporation by making a request supported by an affidavit stating that the information will only be used for matters relating to the corporation. Certain provinces (including British Columbia and Manitoba) have introduced similar legislation, whilst others are working on implementation.
- In February 2020, the Government of Canada launched a public consultation entitled "Strengthening Corporate Beneficial Ownership Transparency in Canada" which sought views on introducing a centralised register of beneficial owners of corporations that is publicly available to build on the transparency of UBO information. The Governments of British Columbia and Quebec have initiated similar consultations.
- The Quebec government has recently introduced a requirement to disclose certain nominee arrangements to Revenue Quebec, which applies to both existing and new nominee agreements.
- In British Columbia, the Land Owner Transparency Act establishes a public registry of beneficial interests in land in the province, which comes into effect on November 30, 2020.
We hope that Canada's move to greater beneficial ownership transparency will continue to be a balanced approach, allowing Canada to effectively combat crime and tax evasion while respecting the right to privacy.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.