Trusts: New and Expanded Disclosure Requirements

17 Nov Trusts: New and Expanded Disclosure Requirements

Legislation has been proposed for trusts (including estates) with years ending on December 31, 2022 and onwards that would significantly expand the reporting rules. More trusts would be required to file tax returns, and more information would be required to be disclosed in these returns. In addition, sizable penalties would be introduced for non-compliance.

More trusts and estates required to file

Under the existing rules, trusts are exempt from filing a T3 tax return if they have no taxes payable and no dispositions of capital property. However, under the proposals, tax returns will be required for all Canadian resident express trusts (this generally means trusts created deliberately) that do not meet at least one of a number of exceptions. Some of the more common exceptions include the following:

• trusts in existence for less than three months at the end of the year;
• trusts holding only assets within a prescribed listing (including items such as cash and publicly listed shares) with a total fair market value that does not exceed $50,000 at any time in the year;
• trusts required by law or under rules of professional conduct to hold funds related to the activity regulated thereunder, excluding any trust that is maintained as a separate trust for a particular client (this would apply to a lawyer’s general trust account, but not specific client accounts); and
• registered charities and non-profit clubs, societies or associations.

Reporting will be required where a trust acts as an agent for its beneficiaries (referred to as bare trusts in the government’s explanatory notes). No details on the intended breadth of such trusts have been provided by the Department of Finance or CRA to date.

More disclosure of parties to trusts

Where a trust is required to file a tax return, the identity, including residency, of all of the following people must be disclosed:

• trustees, beneficiaries and settlors; and
• anyone that has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust.

The requirement to provide information in respect of the beneficiaries would be met if beneficiary information is provided for all whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. Where there are beneficiaries whose identity is not known or ascertainable with reasonable effort, the person making the return would be required to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. For example, where the beneficiaries are both the current and future grandchildren of the settlor, details in respect of the current children must be provided in addition to details of the trust terms describing the future class of beneficiaries.

The new rules would not require the disclosure of information subject to solicitor-client privilege.

Substantial penalties

Failure to make the required filings and disclosures on time attract penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties have been proposed, applicable to filings not made on time and inaccurate filings. These penalties are proposed to be the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime, leading to the concern that multiple persons could be subject to these substantial penalties for a single trust.

Action: Make a list of all arrangements that you and your family have that may be considered a trust or bare trust. Review them with a professional to determine whether they would be subject to the rules. Obtain relevant information that will be required for the filing of the particular trust returns.