Budget 2018 announced, and Budget 2019 confirmed, that trust
reporting requirements are changing in 2021. While it may have felt
far away at the time, 2021 is now almost upon us. If they have not
already, it is time for trustees to start thinking about the
implications of these changes. They need to ask themselves, are the
benefits of a trust worth the effort and risks?
The new reporting requirements
The proposed changes primarily affect express trusts, that is
trusts created by specific intent, usually in writing. As it stands
right now, these trusts are generally only required to file if
certain circumstances arise during the taxation year, for example
if the trust earns income, disposes of capital property, or makes
distributions to beneficiaries. In other words, if nothing changes
for the trust then nothing is reported.
Starting in 2021, except for a few specifically exempted types of
trusts (such as mutual fund trusts or trusts that qualify as
registered charities), express trusts resident in Canada
must:
- file income tax returns annually in the form of a T3 Trust
Income Tax and Information Return (T3);
- report all the settlors, trustees and beneficiaries of the
trust; and
- identify any persons who exert control over the trustee's
decisions concerning income and capital
("protectors").
This new information will be filed as a new schedule (yet to
be released) with the T3. The information reported on the settlors,
trustees and beneficiaries includes each individual's taxation
identification number (usually their social insurance number),
birth date, address and jurisdictions of residence.
Increased risks associated with the new reporting
requirements
Failing to comply with these new requirements can mean harsh
penalties. Filings that are late or fail to provide the required
additional information are penalized $25 a day for each day the
filing is late, from a minimum of $100 to a maximum of $2,500.
Additionally, if the failure was made knowingly, or due to gross
negligence, an additional penalty of 5% of the maximum value of the
trust property (minimum $2,500 penalty) will apply.
Collecting this information may be an extremely onerous process,
especially where there is a broad group of beneficiaries, so
consider starting the process sooner rather than later.
Further, this change could have much further reaching
implications.
Once the CRA has this information, a whole new set of other
potential taxation issues arise. For example, the increased
availability of beneficial ownership information of corporations
means the CRA can crack down on related shareholders and associated
corporations. Theoretically, beneficiaries of trusts that they
did not even know existed could now be facing major tax
implications from association rules.
As a result, this could impact a trustee's obligation to
disclose the existence of a trust to beneficiaries.
In Valard Construction Ltd. v. Bird Construction Co,
2018 SCC 8, the Supreme Court held that a trustee's fiduciary
duty includes an obligation to disclose the existence of a trust to
a beneficiary wherever a beneficiary would be unreasonably
disadvantaged not to be informed of its existence. While this case
arose in the commercial context, the case has already been cited
for its general principles of trust law in other contexts.
If a court were to hold that unforeseen tax consequences to a
beneficiary taxpayer were an unreasonable disadvantage due to not
being informed of the existence of a trust, the trustee could be
personally liable for a breach of its fiduciary
duty.
Trustees should, therefore, consider disclosing the existence of
trusts now to any beneficiaries, including discretionary
beneficiaries, that are currently unaware they are
beneficiaries.
Conclusion
Given the above, trustees should consider whether it would be
preferable to wind up their trusts. There are many reasons,
including tax reasons, why parties will continue to use trusts.
However, many of the tax advantages of using trusts have been
eliminated over the last several years and family circumstances
will have changed. Added with the hassle and risks associated with
the new reporting requirements, some trusts settled several years
ago may no longer make sense.
These conversations must happen soon so restructuring can be
completed before the next taxation year begins.
The lawyers from the
Wills and Estates Group would be happy to
assist you in determining whether it makes sense to continue any
trusts and/or assist with any reorganization or wind-up which may
be advisable.