New trust reporting requirements are coming for calendar year 2021 for many unsuspecting trust administrators. But how did we get to this point of needing to disclose additional information, and what should trust administrators be doing right now?

Without going back to the very beginning, in October 2014 the Financial Action Task Force (FATF) authored a report¹ providing guidance related to its recommendations on transparency and beneficial ownership to create a better system to determine the true ownership of corporations and their assets. The report stated that countries should take measures to prevent the misuse of corporate and other structures or arrangements for money laundering and terrorist financing by ensuring that such legal arrangements are sufficiently transparent. In particular, countries should ensure that there is adequate, accurate and timely information on express trusts (including information on the settlor, the trustee and the beneficiaries) that can be obtained or accessed in a timely fashion by competent authorities.

An evaluation of Canada’s level of compliance with the FATF recommendations was completed in 2015 by FATF and Asia Pacific Group on Money Laundering (APG). The evaluation prompted the September 2016 mutual evaluation report,² which provided a summary of the anti-money laundering and combating the financing of terrorism (AML/CFT) measures in place in Canada. The report concluded that Canada had insufficient access to information related to trusts, and that some information currently being collected by the CRA and financial institutions is not verified, does not always pertain to the beneficial owner, and can be difficult to obtain. 

Subsequent to these reports, the 2018 federal budget provided draft legislation that will require administrators of express trusts to report beneficial ownership information to the CRA. This information reporting will apply to all Canadian resident³ express trusts with taxation years ending after December 30, 2021. An express trust generally is a trust created with the settlor’s express intent, usually made in writing. See Appendix A of this Tax Alert for a full list of trusts excluded from the new reporting requirements.

The new requirements are placed on the trust administrators (trustee or executor), who must provide the following information in relation to the settlor, the trustees, the beneficiaries, and persons that can exert control of the trust:

• name;
• address;
• date of birth (only for individuals);
• jurisdiction of residence; and
• taxpayer identification number.

The trust may be subject to existing non-compliance penalties for providing incomplete or inaccurate information, or for not filing the prescribed form or trust return. In addition to these existing penalties, the administrator of the trust may be subject to harsh penalties for knowingly or, under circumstances amounting to gross negligence, making or participating in, assenting to or acquiescing in the making of a false statement or omission of required information. This additional level of penalty is equal to the greater of $2,500 and five per cent of the highest total fair market value of all the property held by the trust in that year. There are exceptions to some of these potential penalties if reasonable effort is undertaken to file complete and accurate information.⁴

Beneficiaries and trustees must provide this information to the CRA even if they were only a trustee or beneficiary for one day during any given taxation year after 2020. Any trustee or beneficiary who does not want to have the above information reported to the CRA should consider making a change to their status no later than December 31, 2020. Before a trustee resigns or a beneficiary gives up their beneficial interest, they should review the trust indenture and consult with a Baker Tilly advisor. Not all trust indentures are written the same, and there could be negative tax consequences related to a change in trustee or beneficiary.

At Baker Tilly, we recommend that any administrator of a trust should take a proactive stance regarding these new reporting requirements. The first filing deadline to report this information may not be until March 31, 2022 (for the 2021 taxation year), but any plan to remove a trustee or a beneficiary must be done before the end of the 2020 calendar year. Otherwise, that person will be subject to the new reporting requirements. The information-gathering process may also be hindered if there are beneficiaries who are not known or ascertainable, or who are uncooperative.

Administrators seeking to be proactive with these reporting requirements can consider several strategies prior to January 1, 2021:

1. Locate your trust indenture (original or a copy).
2. Talk to your Baker Tilly advisor to determine if your trust is subject to the new reporting requirements.
3. Assuming your trust is subject to the new reporting requirements, review the trust indenture to identify each person that must be reported.
4. Contact each person identified and notify them of the information that will be reported to the CRA.
5. If any individuals are apprehensive about reporting this information to the CRA, advise them of your legal obligation to report, and of the potential penalties for non-disclosure.
6. If any individuals remain apprehensive about reporting this information to the CRA, speak to your Baker Tilly advisor to ascertain the potential consequences of removing that person from the trust (e.g. resign as trustee or relinquish beneficial interest).
7. Contact your Baker Tilly advisor for a checklist to assist with gathering the required information.
8. As administrator, you are the custodian of this information. Ensure that it remains confidential by storing the information properly.
9. Provide this information to your Baker Tilly advisor to include in the 2021 trust return to be filed with the CRA prior to March 31, 2022.

As indicated above, these reporting requirements are part of a global trend to crack down on money laundering and terrorist financing. They also reflect the CRA's desire to better assess the tax liability for Canadian trusts and their beneficiaries. Auditor General Sheila Fraser issued a quarterly report back in November 2005 that noted the CRA’s inability to properly assess the potential tax liability of Canadian trusts and their beneficiaries. These new reporting requirements will provide additional information to allow the CRA to develop better checks and balances to reduce the risk of unreported taxes.

With more information being reported to the CRA, it is important to understand your reporting obligations to avoid penalties and possible disputes with individuals about whom you are disclosing personal information.

Appendix A

This is a full list of exclusions to new reporting requirements. A trust that meets one of these exclusions will not be required to report the new information:

• Trusts that have been in existence for less than three months;
• Trusts that hold assets with a total fair market value that does not exceed $50,000 throughout the year, where the only assets held by the trust throughout the year are one or more of
  • cash,
  • certain government debt obligations,
  • a share, a debt obligation or a right listed on a designated stock exchange,
  • a share of the capital stock of a mutual fund corporation,
  • a unit of a mutual fund trust, and
  • an interest in a related segregated fund (within the meaning assigned by paragraph 138.1(1)(a) of the Act);
• Trusts that are required under the relevant rules of professional conduct or the laws of Canada or a province to hold funds for the purposes of the activity that is regulated under those rules or laws, provided the trust is not maintained as a separate trust for a particular client or clients (this provides an exception for a lawyer’s general trust account, but not for specific client accounts);
• Trusts that qualify as non-profit organizations or registered charities;
• Mutual fund trusts, segregated funds and master trusts;
• Graduated rate estates;
• Qualified disability trusts;
• Employee life and health trusts;
• Certain government-funded trusts;
• Trusts under or governed by a deferred profit-sharing plan, a pooled registered pension plan, a registered disability savings plan, a registered education savings plan, a registered pension plan, a registered retirement income fund, a registered retirement savings plan, or a tax-free savings account; and
• Cemetery care trusts and trusts governed by eligible funeral arrangements.