Changes to trust reporting requirements first proposed in the 2018 federal budget are coming into effect for the taxation year ending Dec. 31, 2021.
Under the new requirements, non-resident trusts that currently file a T3 return and express trusts (e.g., family trusts) that are resident in Canada — with some exceptions — must report the identity of all trustees, beneficiaries, settlors and each person who can exert control over a trustee’s decision concerning income or capital.
Currently, trusts that don’t earn income or make distributions generally aren’t required to file annual T3 returns. Those that do file aren’t required to report the identities of all beneficiaries.
According to the Canada Revenue Agency (CRA), the changes are meant to improve the collection of beneficial ownership information and to help the CRA assess the tax liability of trusts and their beneficiaries.
Although the 2021 tax reporting deadline is more than a year away, clients who are connected to trusts should take all necessary steps before the end of this year to meet the new disclosure requirements.
That’s because if a client is a trustee or a beneficiary “for only one day” in 2021, the trustee will be required to file a T3 return and disclosure for the year, cautions John Fabbro, partner and GTA tax enterprise leader with KPMG Canada in Toronto.
Beginning in the 2021 tax year, a trust must disclose the name, address, date of birth, residence address and taxpayer identification number (i.e., social insurance or business number) for trustees, beneficiaries, settlors and controlling people. The new information must be filed using a separate schedule accompanying the T3.
Trusts that are exempt from the new filing requirements are mutual fund, segregated fund and master trusts; employee life and health trusts; qualified disability trusts; trusts that qualify as non-profit organizations or registered charities; and trusts that have been in existence for fewer than three months and hold less than $50,000 in assets throughout the year.
You should alert clients who are connected to trusts that may “no longer serve a useful purpose” or are redundant, says Margaret O’Sullivan, managing partner of O’Sullivan Estate Lawyers LLP in Toronto. In these cases, she says, the “trusts should be wound up before yearend” to avoid having to comply with the new disclosure requirements.
Henry Korenblum, estate and taxation consultant with the Rosedale Family Office, a unit of Wellington-Altus Private Wealth Inc. in Toronto, says clients also could distribute key assets within certain trusts before yearend. For example, trustees may wish to roll out assets to the beneficiaries, if appropriate, or sell assets to a corporation.
Clients also can use wills to bequeath cash legacies instead of using alter ego or partner trusts, suggests O’Sullivan.
Many continuing trusts will have to adjust to the new disclosure rules. Some of those trusts previously did not have to file a return, but will have to do so beginning next year, says Fabbro.
For example, trusts that hold a cottage or a vacation home in the U.S. and trusts that hold private company shares previously did not have to file a return if they did not receive any income, O’Sullivan says. But now those trusts will have to. O’Sullivan suggests that some of these trusts may hold valuable assets that must be disclosed, potentially revealing previously unknown or hidden tax liabilities for beneficiaries.
As well, collecting the required identification information for connected people and entities could be challenging, Korenblum suggests.
For example, many family trusts were set up to “make them as flexible as possible and include the broadest class of beneficiaries, including minors and contingent beneficiaries,” Korenblum says. Some of these beneficiaries may not know they are beneficiaries, so requesting their social insurance numbers can raise a lot of questions, he contends.
Adds Fabbro: “[Currently], there are no requirements for [beneficiaries] to sign anything or [for the trustee to] disclose that they are beneficiaries.”
In general, O’Sullivan says, the new rules “can give rise to a number of privacy issues.” Information that was “intended to be private will now become public,” she says.
Failure to file a T3 return or provide the additional information required can result in costly penalties from the CRA. The penalty for not filing a T3 will be $25 per day, with fines ranging from $100 to $2,500. There will be additional penalties, equal to 5% of the maximum fair market value of property held in the trust during the relevant year, for knowingly failing to file or for gross negligence.