Getting ready for new trust disclosure rules

Failure to report comes with stiff penalties

In a previous article, we wrote about the global move to greater transparency by government and taxing authorities, which they claim is necessary to combat money laundering and tax evasion.

As part of that agenda, which the government asserts is necessary to ensure the effectiveness and integrity of the Canadian tax system, new income tax rules have been introduced that require trusts (with limited exceptions) to provide additional information. As well, certain trusts that may have had no reporting and disclosure obligations because they had no income will now be required to file a trust income tax and information return.

The first reporting and disclosure year will be 2021. That means 2020 will be a busy time for trustees and their professional advisors as they come to terms with the new rules. Trusts that have no income and previously did not file a tax return, for example trusts used to hold a cottage, residence, or U.S. vacation home, as well as trusts used to hold private company shares as part of an estate freeze, are caught by the new rules and will now have to file a tax and information return.

The information that must now be disclosed for all trusts with reporting obligations will include the name, address, date of birth (if applicable), and tax identification number of the settlor, trustees, and beneficiaries, as well as persons who have the ability to exert influence over trustee decisions, such as a protector.

Failure to report comes with stiff penalties. If a taxpayer knowingly fails to disclose, or if there is gross negligence, the penalty is the greater of $2,500 and 5% of the highest fair market value of the trust’s assets. For a trust that holds a cottage worth $3 million, that could be a whopping $150,000.

Given these disclosure requirements, and the need to obtain information from beneficiaries, such as their date of birth and social insurance number, a number of privacy issues arise, in particular where the trust has a class of contingent beneficiaries who may not be aware of the trust and that they are beneficiaries. Trust planning will now have to carefully balance these considerations and more onerous reporting requirements.

No doubt 2020 will see a lot of activity as trustees prepare for the new rules, including winding up trusts where appropriate, such as those that are redundant and no longer serve a purpose, and obtaining the necessary information to make the disclosure come 2021.

The idea of a “private” trust may slip from our vernacular in 2021, as the public sphere grows wider, the private sphere shrinks, and change becomes more than ever the new constant.

Margaret O’Sullivan is the principal of the Toronto-based trusts and estates law firm O’Sullivan Estate Lawyers. She practices exclusively in the areas of estate planning, estate litigation, advising executors, trustees and beneficiaries, and administration of trusts and estates. This article originally appeared in the O’Sullivan Estate Lawyers blog. Reprinted with permission.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. It is not intended to provide specific personalized advice on any individual situation, including, without limitation, investment, financial, legal, accounting or tax advice. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your particular circumstances.