Trust rule changes still coming

Reporting and disclosure changes effective Jan. 1, 2021

In our previous blog, “Getting ready for new trust disclosure rules,” we wrote about the new Canadian trust reporting and disclosure rules coming into effect in 2021. Whatever you may think of the new requirements, if you are a trustee of an existing “express” trust (i.e., a trust created by a person during his or her lifetime or in his or her will), you will need to ensure you comply with them even if the trust earns no income and has no activity during the year. Even some trusts with minimal assets will be caught by the new rules.

The information that must be disclosed for all trusts with reporting obligations includes names, addresses, dates of birth (for individuals), jurisdictions of residence, and tax identification numbers (Canadian or foreign). It also includes of all of the following:

The settlor (creator) of the trust.
Each of the trustees.
Each of the beneficiaries, including contingent beneficiaries and 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 (such as a protector).

The required information must be filed as a schedule to a T3 trust tax return and cannot be filed on its own. Non-resident trusts that are required to file a T3 trust tax return are also subject to the new disclosure rules. If a trustee knowingly fails to disclose, or if there is gross negligence, 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.

The first reporting year for the new disclosure rules will be 2021. This means that any trust with the disclosure obligations in existence on January 1, 2021, will be required to comply with the new rules. Trusts which previously had no income tax filing obligations may find themselves required to do so under these new rules.

Some exceptions do apply. Graduated rate estates, qualified disability trusts and trusts that qualify as non-profit organizations or registered charities are not required to comply with the new disclosure obligations. Also, trusts that have been in existence for less than three months or that hold assets valued at less than $50,000, if these assets are bank deposits, government debt obligations or publicly-traded securities, throughout the taxation year are also exempt. A trust that holds less than $50,000 worth of shares in a privately-held corporation would not be exempt, however.

While the government has extended many tax deadlines recently, the date these new rules come into effect has not been postponed at the date of writing. We will update our readers should that change.

In the meantime, trustees need to get ready for the new rules, and begin gathering the necessary information now to avoid being caught without the ability to disclose should beneficiaries be uncooperative. Where appropriate, trustees should consider winding up trusts, such as those that no longer serve a purpose.

With just over five months left in 2020, there isn’t much time to lose now. As always, experienced advice should be sought to ensure that obligations are met and trustees are not subjected to financial and emotional distress which could have been avoided.

Susannah Roth is a member or 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. Reprinted with permission.

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