Musts for trusts ⁠–⁠ New reporting requirements

New trust reporting requirements are coming for calendar year 2023. But how did we get to this point of needing to disclose additional information? And what should trust administrators be doing now?

Essentially, in October 2014, the Financial Action Task Force (FATF) authored a report¹ providing guidance related to its recommendations on transparency and beneficial ownership, with the aim of creating a better system to determine the true ownership of corporations and their assets. The report stated countries should enact measures to prevent misuse of corporate and other structures, or arrangements for money laundering and terrorist financing, by ensuring such arrangements are sufficiently transparent. In particular, countries should ensure there is adequate and accurate information on express trusts (including information on the settlor, trustee and beneficiaries), obtainable in a timely fashion by competent authorities.

In 2015, an evaluation of Canada’s compliance with FATF recommendations was completed by the FATF and Asia Pacific Group on Money Laundering (APG). This prompted the September 2016 mutual evaluation report², which provided a summary of anti‑money laundering and combating financing of terrorism (AML/CFT) measures in Canada. The report concluded Canada had insufficient access to information related to trusts, and some information collected by the Canada Revenue Agency (CRA) and financial institutions is unverified, does not always pertain to the beneficial owner and can be difficult to obtain.

Canada’s response ⁠–⁠ reporting beneficial ownership

In 2018, the federal government introduced draft legislation requiring express trust administrators to report beneficial ownership information to the CRA. With modifications, this draft was introduced into the House of Commons on Nov. 4, 2022 under Bill C‑32. This information reporting will apply to all Canadian resident³ express trusts with taxation years ending on or after Dec. 31, 2023.

Generally, an express trust is a trust created with the settlor’s express intent, usually in writing. Bare trusts and arrangements where the trust can reasonably be considered to act as agent for all the beneficiaries are also considered express trusts for reporting purposes. Appendix A outlines an enumerated list of trusts excluded from new reporting requirements.

Reporting and penalties

Reporting requirements fall on the trust administrators (trustee or executor), who must provide the following information about the settlor, trustees, beneficiaries and persons who can exert control of the trust:

Name
Address
Date of birth (for individuals only)
Jurisdiction of residence
Taxpayer identification number

The trust may be subject to existing non‑compliance penalties for providing incomplete or inaccurate information, or not filing the prescribed form or trust return. In addition, the administrator may be subject to harsh penalties for knowingly or ⁠–⁠ under circumstances amounting to gross negligence ⁠–⁠ making or participating in, assenting to or acquiescing in providing a false statement or omission of required information. This additional penalty level is equal to the greater of $2,500 and five per cent of the highest total fair market value of all property held by the trust in that year.⁴ An exception to this additional penalty applies if the beneficiary is not ascertainable.

Beneficiaries and trustees must provide this information to the CRA even if they were only a trustee or beneficiary for one day during any given taxation year after 2022.

Prepare early

To minimize potential issues with gathering the required information, Baker Tilly recommends administrators take a proactive stance and start gathering such information well in advance of the March 30, 2024 filing deadline (2023 taxation year). This will allow administrators adequate time to deal with unforeseen situations, such as: missing trust indenture, missing an individual’s contact information, uncooperative individuals and deceased individuals.

As an administrator, one should consider the following:

Locate your trust indenture (original or copy).
Talk to your Baker Tilly advisor to determine if your trust is subject to the new reporting requirements.
Assuming your trust is subject to the new reporting requirements, review the trust indenture to identify each person who must be reported.
Contact each person identified and notify them of the information that will be reported to the CRA.
If any individuals are apprehensive about reporting this information to the CRA, advise them of your legal obligation to report, and of the potential penalties for non‑disclosure.
If any individuals remain apprehensive about reporting this information to the CRA, speak to your Baker Tilly advisor.
Contact your Baker Tilly advisor for a checklist to assist with gathering required information.
As administrator, you are the custodian of this information; ensure it remains confidential by storing the information properly.
Provide this information to your Baker Tilly advisor to include in the 2023 trust return to be filed with the CRA by March 30, 2024.

With more information required by the CRA, it is vital to understand your obligations, thereby avoiding penalties and possible disputes with individuals about whom you are disclosing personal information.

Appendix A

This is a full list of exclusions to new reporting requirements. A trust that meets any one of these exclusions is not required to report the new information:

Trusts in existence for less than three months
Trusts that hold assets with total fair market value not exceeding $50,000 throughout the year, and where the only assets held throughout the year are one or more of:
money
certain government debt obligations
a share, debt obligation or right listed on a designated stock exchange
a share of the capital stock of a mutual fund corporation
a unit of a mutual fund trust
an interest in a related segregated fund (within the meaning assigned by paragraph 138.1(1)(a) of the Act)
an interest as a beneficiary under a trust, all the units of which are listed on a designated stock exchange
Trusts required under the relevant rules of professional conduct or laws of Canada or a province to hold funds for the purposes of the activity regulated under those rules or laws, provided the trust is not maintained as a separate trust for a particular client(s); this provides an exception for a lawyer’s general trust account but not specific client accounts
Trusts that qualify as non‑profit organizations or registered charities
A trust in which all units are listed on a designated stock exchange
Mutual fund trusts, segregated funds and prescribed master trusts
Graduated rate estates
Qualified disability trusts
Employee life and health trusts
Certain government‑funded trusts
Trusts under or governed by a deferred profit‑sharing plan, pooled registered pension plan, registered disability savings plan, registered education savings plan, registered pension plan, registered retirement income fund, registered retirement savings plan, tax‑free savings account, employee profit sharing plan, registered supplementary unemployment benefit plan, or first home savings plan
Cemetery care trusts and trusts governed by eligible funeral arrangements

¹ FATF Guidance “Transparency and Beneficial Ownership,” October 2014.
² FATF and APG “Anti‑money laundering and counter‑terrorist financing measures” Canada Mutual Evaluation Report, September 2016.
³ This includes trusts deemed to be resident in Canada.
⁴ The reasonable effort exception does not apply to all penalty provisions and is beyond the scope of this article. See “Beneficial ownership reporting – beware of penalties” by John Oakey for a detailed discussion of penalties.