New trust reporting rules may impact unsuspecting Canadians
from CPA Canada
Sweeping new trust reporting requirements in Canada have raised concerns that many long-term trustees, who have never previously had to make a disclosure, will fail to recognize their new reporting obligations.
“Some existing trust positions are very simple, well accepted, and have stood for a long time. For example, a trust might have been set up for a responsible person to protect the assets of a vulnerable family member,” says John Oakey, vice-president of taxation for CPA Canada in Toronto.
Legislation in Canada was originally introduced in 2018, following up on new beneficial ownership reporting for trusts rules proposed in that year’s federal budget. The legislation that ultimately passed in 2022 was expanded to cover bare trusts and is applicable to trusts with taxation years that end after December 30, 2023.
“The new rule casts such a wide net that some might not even realize they have beneficial ownership of a trust, let alone their new reporting obligations associated with that,” says Oakey.
Concerns behind new rules
Bare trusts are of particular concern because they are widespread and encompass many common trust situations. For example, a parent co-signing a mortgage to financially assist a son or daughter who might not otherwise qualify because of low earnings might be considered to have established a bare trust for tax purposes, Oakey notes.
If a child inherited more than $50,000 from his or her grandparents and it was held for them in trust in a bank account, or if a parent is managing an account in trust for an adult child with a disability, those types of situations might also qualify as trusts for which reporting is required, he adds.
Before this new legislation was passed, reporting requirements were very limited and straightforward. For example, if capital property inside of a trust was sold, that information would need to be disclosed. Today, unless a trust has been listed by CRA as specifically exempt from the new, expanded reporting rules, trustees of any kind of trust need to carefully examine their potential reporting obligations.
The new beneficial ownership of trust rules originated from a Financial Action Task Force (FATF) report in 2014 that provided international guidance for improving transparency regarding beneficial ownership, as part of a global effort to prevent money laundering and terrorist financing.
The FATF wanted to prevent situations such as, for example, where a shell company was established, but authorities had no idea who that shell company belonged to, or where a trust was established, but the beneficial owner(s) of that trust could not be traced.
“The addition of so many bare trust arrangements to the beneficial ownership of trust rules in Canada has, however, provided a massively expanded reach,” says Oakey. “That might result in so much transactional information flowing in from accountants, lawyers, and other professionals, that there is an unintentional dilution of the type of reporting the government specifically wanted to monitor.”
What to file
Trustees who are required to report under the new rules must complete and file to CRA both a T3 Trust Income Tax and Information Return, and a Schedule 15 Beneficial Ownership Information of a Trust return. The 2024 deadline is Tuesday, April 2.
There are strict penalties of $25 per day up to $2,500 for non-filing. A required form that is missing information can result in a $100 penalty per occurrence. If a form is missing substantial information, CRA can determine that form to be invalid and impose the maximum penalty of up to $2,500.
For situations that involve gross negligence or false statements, the maximum penalty is even higher—the greater of $2,500 and five per cent of the fair market value of all property held in the trust.
Trustees need to collect the information required, which could present logistical difficulties if documentation is lacking. This has raised concerns that trustees could face penalties for situations in which information is incomplete or missing entirely.
The regulations accompanying this new legislation require that a reasonable effort be expended by trustees to obtain the necessary trust information for the tax return. If they do so, and discover that a trust has unknown beneficiaries, and therefore no information can be filed, they might be protected under the regulations by what amounts to a due diligence defense.
“Trustees should make a reasonable attempt to acquire the necessary information about each person associated with the trust that needs to be reported, in order to try and minimize the chances of a penalty being assessed,” advises Oakey. “If only partial information is available, the prudent course of action is to disclose everything that is available. But do not simply ignore that person completely, as there is still a reporting obligation.”
In response to concerns raised by CPA Canada, CRA stated there would be relief from penalties if the T3 return and Schedule 15 for bare trusts for the 2023 taxation year are not filed by the 2024 tax deadline. However, late returns must still be filed after the deadline, and in instances where a taxpayer knowingly fails to file or fails to file due to gross negligence, penalties might still apply.
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