New Trust Tax Reporting Rules
There are new trust reporting requirements beginning in 2021. For the 2021 taxation year and beyond, most trusts will be required to report additional information to Canada Revenue Agency (“CRA”) regarding the beneficial ownership of the trust. This enhanced reporting requirement stems from a global effort to improve the transparency of corporate structures through beneficial ownership. Please note, these new trust reporting requirements are not applicable to Graduated Rate Estates. A Graduated Rate Estate is an estate that arises as the result of the death of a person on or after December 31, 2015, for 36 months after the person’s death.
With these new reporting requirements, the trust will be required to include a new schedule with its annual T3 return reporting the identity of all trustees, beneficiaries and settlors of the trust, as well as the identity of each person who has the ability to exert control over the trustees’ decisions regarding the distribution of income or capital of the trust. The specific information that must be provided regarding the identity of each person is as follows:
- Full name,
- Date of birth (if an individual),
- Jurisdiction of residence, and
- Taxpayer identification number (e.g. Social Insurance Number).
Any person listed or acting as trustee or beneficiary of the trust in the calendar year 2021 will need to have the above information disclosed to CRA. In order to avoid the disclosure of a person’s information, that person cannot be a trustee or beneficiary of the trust after December 31, 2020. Before a beneficiary or trustee gives up their position or interest in the trust, please consult with your Baker Tilly advisor to ensure there are no negative tax consequences.
The responsibility to report this additional information is placed on those individuals that administer the trust (e.g. trustees or executors). Any false or omitted information or non-filing of the information can result in a penalty assessed to the trust.
For further details on how to prepare for the new rules, see the additional information in Appendix A below.
Please note, if you believe that your trust no longer serves a purpose, it may be preferable to formally wind up the Trust prior to December 31, 2020 so that the trust does not need to comply with the new trust reporting requirements. The wind up of a trust can have significant tax consequences, so should you desire to wind up the Trust, please your Baker Tilly advisor as at your earliest convenience to assist with tax planning and providing instructions to your lawyer.
Appendix A – Preparing for the Rules
Discuss reporting requirements with individuals involved
Prior to January 1, 2021, it is recommended that the administrator of the trust, review the trust indenture and identify all potential persons that would fall under the “beneficial ownership” reporting requirements. Once these persons are identified, each person should be notified about their personal information being reported to CRA.
Gather required information
Gather the necessary information required for the 2021 taxation year of the trust. Provide the information to your Baker Tilly advisor well in advance of March 31st, 2022.
Responsibility for maintaining information (privacy and confidentiality)
As administrator of the trust, you are responsible for ensuring that the information gathered is kept confidential and private.
What to do if individuals won’t provide information
The responsibility for identifying individuals subject to the reporting requirements rests with the administrator of the trust (trustee or executor). There is an exception to the potential penalty for any false or omitted information or non-filing of the information. We currently don’t have sufficient guidance from Department of Finance or Canada Revenue Agency with regards to applying the penalty exception. It would be recommended that the administrator of the trust, document the reasonable attempts to gather the necessary information and disclose all information available at the time of filing. If the administrator still has concerns, contact your Baker Tilly advisor.
What can happen if a trustee or executor resigns
We recommend consulting your Baker Tilly advisor before any trustee or executor resigns. There are various tax and other issues that could arise as a result.
What about contingent beneficiaries
The Income Tax Act defines beneficiaries as a person beneficially interested. Beneficially interested includes a person or partnership that has any right whatsoever (immediate or in the future, absolute or contingent or conditional on the exercise of someone’s discretion) as a beneficiary under a trust to receive any of the income or capital of the trust, directly or indirectly through one or more trusts or partnerships. Beneficially interested also includes a particular person or partnership who is not named as a beneficiary under a discretionary trust but who, because of the terms or conditions of or any arrangements in respect of the trust, might become beneficially interested at a later time because of the exercise of the discretion.
If a contingent beneficiary meets the definition of beneficially interested and is known or ascertainable, then their identity and information should be disclosed.
The responsibility for gathering, reporting and verifying the accuracy of the beneficial ownership information discussed in this letter rests with the administrator of the trust.