Update on changes to trust reporting rules

Government tinkers, trustees scratch their heads

Up until now, filing a T3 has not usually been a large deal. In addtion to income and distributions to beneficiaries, the information required to be disclosed was relatively simple: the trustee, name of the trust, and address. The 2018 budget proposed changes that were to become effective for 2021 and subsequent tax years. But those changes raised serious privacy concerns. The original legislation was deferred and sent back to the drawing board with new draft legislation introduced in early February. Here’s a look at where things stand now.

Specifically, the 2018 budget proposed that disclosure is to be made for all trustees, beneficiaries, and settlors (including anyone who is able to exert control over trustee decisions in relation to allocations of trust income or capital, such as a Protector) of a trust, even if a beneficiary didn’t receive a distribution. This requirement is in respect of “express trusts.”

Although the Tax Act does not actually provide a definition for an express trust, it appears that an express trust is one that is deliberately created. So this seems to capture all discretionary family trusts. Certain trusts are excluded, including graduated rate estates, qualified disability trusts, non-profit trusts, and registered charities or trusts that are less than three months old or that generally holds less than $50,000 worth in assets throughout the year (provided that the assets do not include shares of a private company or real estate).

Loss of privacy

For all other trusts (including a typical discretionary family trust) that hold value more than $50,000, then you no longer have the privilege of complete privacy. So, if you formed a discretionary trust where you included everyone but the family dog as a discretionary beneficiary, the disclosure requirements may well cause a large headache for you.

What if your class of beneficiaries include contingent beneficiaries? How do you determine who needs to be part of the disclosure? The new proposed rules require that the person filing the return for the trust disclose all beneficiaries, including contingent beneficiaries, whose identity is known or ascertained with reasonable effort.

Another proposed change is that even if a trust had no income payable in the year, it will be required to file a T3 (currently, the general rule was that a trust didn’t have to file if there was no income payable in the year).

And to reinforce these new rules, new penalties will be introduced for failure to file a T3 with the proper disclosure information ($25 a day with a minimum of $100 and a maximum of $2,500). If the failure to file was made knowingly or due to gross negligence, there is an additional penalty of 5% of the maximum fair-market value of the property held (with a minimum penalty of $2,500). This latter penalty can end up being quite punitive if a family trust is sitting on shares of a company that has significant value.

Government confusion

However, since 2018, there has been much confusion among tax practitioners as to how these rules were to be applied. And the government did not offer much clarity, because no legislation had actually been introduced. And then on Jan. 14, 2022, the government announced it was going to defer the application of the new disclosure rules as the legislation in respect of these new disclosure rules is still pending.

This meant that the Canada Revenue Agency will continue to administer the existing rules for trusts and that proposed enhanced beneficial ownership reporting will not be required for the 2021 tax year.

And then, not even a month later on Feb. 4, the government dropped its draft legislation as part of a larger set of new rules to implement various measures announced in the 2021 federal budgets.

Now what?

The draft legislation as it related to the trust disclosure rules included the following (in addition to the above noted changes first introduced in 2018):

Disclosure of information on a T3 return, including Beneficial Ownership and Control Information, is not required if the information is subject to solicitor-client privilege.
An arrangement under which a trust can reasonably be considered to act as agent for all the beneficiaries under the trust with respect to all dealings with all of the trust’s property (commonly referred to as a “bare trust”) is now explicitly subject to the new trust filing and reporting rules. This is a big change, as bare-trust arrangements have never been required to file T3 returns. This will have a huge effect on the real estate industry as it is common to have a bare-trust corporation hold title to real estate for a third-party beneficiary for various reasons (creditor protection, financing issues and planning act issues to name a few).
Under the original release in 2018, certain types of trusts were exempted from the new reporting requirements, such as mutual fund trusts, segregated funds, master trusts and trusts governed by registered plans. However, investment funds organized as trusts that did not qualify as “mutual fund trusts” were not exempt. However, the new 2022 draft legislation now exempts trusts, all the units of which are listed on a designated stock exchange (this includes trusts that, though publicly listed, are not widely held enough to qualify as mutual fund trusts).

The 2022 draft legislation also confirmed that the new reporting rules will be applicable for taxation years of trusts that ended after Dec. 30, 2022.

Remember, though, that this is still draft legislation. The government had asked for comments on the various pieces making up the February 4 draft rules. The deadline was in early April, so it will be interesting to see what comments were submitted and how the government will react.

I’ll keep monitoring developments and report on them as they evolve. Stay tuned.

Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3^rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. A version of this article first appeared in The TaxLetter, © 2022 by MPL Communications Ltd. Used with permission.

Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.