You and your clients have three years to get ready for new rules for private trusts. Included in the 2018 federal budget are requirements that will affect both tax filing and disclosure related to these trusts.
Under the current reporting and filing requirements, a trust must file a tax return only if it earns income or distributes money. But according to Andrea Tratnik, associate lawyer with Beard Winter LLP’s trusts and estates group in Toronto, most family trusts will be required to file tax returns with the Canada Revenue Agency (CRA) beginning in 2021, regardless of whether a trust earns income or makes distributions in that year.
The federal government also will require more information about who owns the trust, who benefits from the trust and who can influence the trust. As part of the annual tax return, a schedule must be submitted that provides detailed information about the settlor, the trustees, the beneficiaries and the protectors.
Most of these categories of persons will be familiar to financial advisors, but “protectors” may be a new term, notes Alan Riccardi, assistant vice president with MD Private Trust Co. in Ottawa: “Protectors are those who have an influence over trustee decisions. This is a term not typically used in Canada.”
Someone with the authority to appoint new trustees, for example, would be considered a protector; information about that person must be disclosed under the new reporting rules. At present, only individuals who are trustees are known to the CRA.
“The proposed changes do not change a trust’s tax liability,” says Yoni Moussadji, tax counsel with Counter Tax Lawyers in Toronto. “They simply impose stricter disclosure obligations. For the vast majority of trusts, the proposed changes will do little other than increase their administrative obligations.”
The increased compliance burden may add to the cost of managing a trust, says Tratnik: “Trusts that previously did not need to file tax returns may face increased administration costs as a result of the required filings.”
Trusts – and their trustees – can face significant fines for non-compliance. A trust will be subject to a penalty of $25 a day to a maximum of $2,500 if an information schedule isn’t filed by the deadline, or if the trust provides incorrect or incomplete information. However, if the CRA believes that a trust knowingly failed to file or made a false statement, or that the errors amount to gross negligence, the agency can impose a penalty that amounts to $24,000 or 5% of the fair market value of the trust’s property, whichever is greater.
The proposed penalty provisions can apply both to a trust itself and the trustees, Moussadji says: “In other words, the proposed legislation would allow the CRA to impose the gross negligence penalty on multiple parties for a single failure to file the information form.”
In some cases, failure to report may be an honest oversight, especially when the rules are new and not necessarily widely known, Tratnik says.
“It’s possible that many trusts, particularly non-resident trusts, will incur non-compliance penalties simply due to lack of awareness of the changes,” Tratnik says. “Trust professionals should alert their trustee clients of the new requirements prior to 2021 to minimize the risk of non-compliance.”
The new filing requirements for trusts are part of the federal government’s efforts to crack down on aggressive tax avoidance, tax evasion and money laundering. Canada is not alone in these efforts, Riccardi notes: “The expanded disclosure regulations are in line with a global move to enhanced transparency.”
Although Canada’s legislation mirrors the CRA’s efforts to collect more and more information about taxpayers, it raises a question about what the agency may do with the wealth of information gathered, Moussadji says.
“The CRA would be able to monitor trust assets more closely than ever before,” Moussadji says, “and would be able to examine relationships among trusts, individuals and corporations that may have significant tax consequences beyond the trust’s income.”
For example, Moussadji says, information about beneficiaries, combined with provisions under the Income Tax Act that deem a discretionary trust’s assets to be under the control of its beneficiaries, could result in a corporation losing its status as a Canadian-controlled private corporation. Then, that corporation could lose the associated tax benefits.
Or two corporations could be deemed associated corporations and have to share the small-business deduction as a result.