In February 2018, the federal government announced plans to require extensive tax reporting from all trusts in Canada. Trusts are used for many different reasons, such as to keep family assets private, and to protect children until they are old and mature enough to manage money wisely. But they are also used by some taxpayers to hide information from the government. While trusts that earn income have had to file tax returns and pay income tax for many decades, they have not until now been required to disclose much detail about their ongoing structure, beneficiaries and control — unless they are specifically selected for audit and the Canada Revenue Agency asks for this information. Also, trusts that were not actually paying tax — but might be holding significant assets — generally did not have to file tax returns.
Draft legislation to implement a new reporting regime was released in July 2018, for public comment, with the intention that the rules would come into force for the 2021 tax year. However, after receiving extensive comments, the Department of Finance did not release revised legislation, or include it in a Bill, for several years.
Finally, on February 4 of this year, Finance released revised draft legislation and regulations. At time of writing they had not yet been introduced in Parliament as a Bill, but they will almost certainly be passed this year. The new rules will take effect for the 2022 tax year (technically, for tax years ending on December 31, 2022 or later), so they will apply to trust tax returns for 2022 that must be filed by March 31, 2023.
Under the new regulations (Reg. 204.2), every trust (with some exceptions, discussed below) will be required to disclose the name, address, date of birth, jurisdiction of residence and tax number of every trustee and beneficiary, as well as any person who created the trust or transferred or lent money to it (not counting a transfer for fair market consideration or a loan at a reasonable rate of interest). Any person who is a “protector” or can make certain decisions affecting the trust must be listed as well.
The penalties for non-compliance with this new disclosure will be severe. For even innocent non-disclosure, the penalty for not filing or late filing will be $25 per day, minimum $100 and maximum $2,500 (after 100 days). But on top of that, if the non-compliance is done knowingly or with gross negligence (e.g., wilful blindness), there will be an additional penalty, minimum $2,500 and maximum of 5% of the highest value of the trust throughout the year. So, for example, if someone deliberately doesn’t report this information for 5 years before the CRA finds out, they may be subject to a penalty of 25% or more of the trust’s assets — plus accrued interest on the penalty.
Also under the changes announced on February 4, bare trusts will need to be disclosed as well (ITA s. 150(1.3)). Bare trusts are extensively used in Canada to hold commercial real estate — typically a nominee corporation is the legal owner of a property, as bare trustee for the real owners. If this proposal is not changed, it will mean a lot of compliance problems, and likely extensive penalties being assessed because not every existing bare trust will be identified and reported. If you are involved in ownership of commercial property that is held by a bare trustee, make sure to follow up to find out if this rule is enacted.
Certain trusts are excluded from these rules:
- a trust in existence for less than 3 months at year-end
- a trust holding only cash and certain investments (such as listed stocks and mutual funds) totalling no more than $50,000
- a trust account required by law for a regulated activity, such as for a lawyer or a real estate broker, provided it is not a separate trust for a specific client or clients
- a registered charity, non-profit organization, mutual fund trust, employee life and health trust, and numerous other trusts governed by the Income Tax Act (e.g., RRSP, RRIF, RESP, TFSA, registered pension plan and many others).
If these rules come into force as proposed, and you are a trustee or in control of trust property, you will have to make sure to comply with these rules by March 31, 2023 or you may be subject to the penalties. So you will need to keep on top of this issue and find out when the legislation is enacted and how exactly the rules apply to you.