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Getting Ready for the New Trust Reporting and Disclosure Rules

In a previous blog, “The Movement to Transparency and the Erosion of Privacy” 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 which require trusts (with limited exceptions) to provide additional information. As well, certain trusts which 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. 2020 will be a busy time for trustees and their professional advisors as they come to terms with the new rules. Trusts which 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.

2020 will no doubt 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. Our firm will be communicating with the trustees of trusts we have assisted to establish to alert them with respect to the new rules so they can proactively deal with them.

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

The comments offered in this article are meant to be general in nature, are limited to the law of Ontario, Canada, and are not intended to provide legal or tax advice on any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate to your personal circumstances.