Too much information

Lack of clarity on broader trust reporting rules raises concerns

In a previous article, I wrote about the new Canadian trust reporting and disclosure rules, which were originally to come into effect in 2021. Updated draft legislation was released by the Department of Finance on August 9, 2022, and the legislation is now expected to come into effect for the 2022 tax year, significantly expanding the number of trusts that will now be required to file an annual T3 trust tax return. Here’s an overview of what you need to know if you are a trustee of an existing trust.

First, you’ll need to determine if your trust is caught by the new rules. Exemptions are narrow, but include the following:

Trusts in existence for less than three months.
Trusts holding assets with fair market value of $50,000 or less throughout the year (but only if the assets are cash or investments, if the trust holds an interest in real estate or a private corporation it will still need to comply regardless of the value of the trust assets).
Graduated rate estates, qualifying disability trusts, registered charities, mutual fund trusts, and employee life and health trusts.
Registered plans (e.g., RRSP, RRIF, TFSA).

Trustees should not make the mistake of assuming that their trust doesn’t fall within the rules. The fact that the trust earns no income and has no activity during the year, such as, for example, a trust that holds only a cottage property, does not exempt it from compliance.

Additionally, bare trusts, unless they fall under an exemption, are specifically included in the enhanced reporting regime, which never had the obligation to file before. In Ontario, bare trust planning is commonplace for Estate Administration Tax minimization. As well, “in trust” bank accounts are widely used across Canada, and would fall under the new reporting rules as bare trusts.

Further, if a person remains unaware of their obligations under these new rules until they complete their own income tax filings in April 2023, they will already be late in filing the trust’s tax return. Trust tax filings are due 90 days from the end of the previous tax year, and not April 30 as for individual tax filings or June 30 as for corporate tax filings.

As a refresher, the name, address, date of birth (for individuals), jurisdiction of residence and tax identification number, for all of the following must be disclosed:

The settlor (creator) of the trust or anyone contributing to it (including anyone who makes a loan to it).
Each of the trustees.
Each of the beneficiaries, including contingent beneficiaries, any corporations or other trusts which are current or potential beneficiaries of the trust.
Anyone who has the ability to exert influence over the trustees’ decisions.

Who's an influencer?

This last category is causing some concern among practitioners who have expressed concerns that trust protectors who have specific powers in the trust document are not the only ones who could potentially be considered to exert influence over trustee decisions. It can be argued that tax, legal, and financial advisors exert influence over trustees’ decisions. Do trustees have to include the information for all of their advisors?

Further, there are many family members of trustees who could, theoretically, fall into this category. What if a trustee routinely discusses trust decisions with their spouse or the parent of a young beneficiary? Will these individuals be considered to exert influence over the trustee’s decisions?

To date, the T3 trust tax return form for 2022 has not been released, so many details regarding the reporting required under the new rules remain unclear. It is also unclear what steps a trustee must take to attempt to comply where a beneficiary refuses to cooperate in providing all the required information under the rules. Will the trustee’s attempt to obtain information and the beneficiary’s refusal in writing be sufficient? Will the trustee be required to attempt to obtain a court order to force the beneficiary to comply? Must the trustee then attempt to enforce the court order, if obtained, in the beneficiary’s jurisdiction if they do not live in the trustee’s jurisdiction?

The lack of clarity regarding many aspects of the new rules is especially of concern given the penalty for non-compliance is the greater of $2,500 and 5% of the highest fair market value of the trust’s assets. As an example, for a trust that holds a cottage worth $3 million, the penalty would be $150,000. Ignorance of the rules is rarely an acceptable excuse for non-compliance.

If nothing else, with time, many of these issues should be clarified, although this does little to ease concerns at present. As always, expert advice is a trustee’s best bet. In this case, trustees should not only obtain tax advice, but may wish to consider legal advice regarding whether the trust has outlived its usefulness and should now be wound up.

Susannah Roth is a partner at O’Sullivan Estate Lawyers, based in Toronto. Her practice focuses on estate administration, including cross-border and multijurisdictional administration, advising attorneys and guardians of property, executors, administrators and beneficiaries, real estate transfers and rectification, estate planning (including wills, powers of attorney, insurance and testamentary trusts), and estate litigation. This article originally appeared in the O’Sullivan Estate Lawyers blog. Used with permission.

Notes and Disclaimer

The foregoing is for general information purposes only and is the opinion of the writer. Comments are limited to the law of Ontario, Canada. 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.