With Thanksgiving behind us and the holiday season around the corner, we are quickly approaching the new trust reporting requirements. The new trust reporting comes into effect with taxation years ending after Dec. 30, 2021.
In our February Tax Alert “Trust reporting in 2021 will come sooner than you think,” we discussed the new requirements that will be placed on the trust administrators (trustee or executor). As a reminder, if a trust continues to be in place past Dec. 31, 2020, the trust will need to comply with the new reporting rules and the trust administrators must provide the following additional 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 additional reporting requirement 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 the property held by the trust in that year.
We will highlight some of the important planning decisions that need to be determined before the end of 2020 by the respective administrator of the trust. There is no time to waste!
Business structure
We recommend administrators review their organizational structure with a Baker Tilly advisor to see if the trust is still useful and provides a purpose. A trust that may no longer serve a purpose will now lead to additional compliance costs on an annual basis. A review of the trust indenture and the organizational structure can lead to a proactive solution before 2021. Any trusts not exempt under the new rules will be required to report starting in 2021.
This can be a great time for discretionary family trusts who are coming up on their 21-year anniversary to review their structure. A trust can distribute assets and wind up before 2021 to avoid the new reporting rules and compliance altogether. The process of winding up a trust and distributing its assets can be complex and should follow a detailed plan.
Trustees and beneficiaries
Once the organization structure is reviewed and the trust is determined to serve a purpose, the administrator should consider reviewing the trustees and beneficiaries of the trust. The additional reporting rules require information of all trustees and beneficiaries, even if they were only a trustee or beneficiary for one day – starting in 2021. If a beneficiary has indicated they wish to give up their beneficial interest or a trustee wishes to resign, this should be completed before Jan. 1, 2021 to avoid reporting their personal information to the Canada Revenue Agency (CRA).
Before a trustee resigns or a beneficiary gives up their beneficial interest an administrator should carefully review the trust indenture to determine if any limitations exist.
Compliance costs and organization
It is now more critical than ever to maintain proper books and records. We strongly recommend each trust keep a minute book of all annual resolutions, minutes, notices of assessments and accounting records. The additional reporting information may lead to specific CRA audit programs specifically targeting trusts. Having an up-to-date minute book and records are crucial in supporting tax filings.
In the past, most trusts that had no income were not required to file a T3 Trust Income Tax and information return. With the new reporting rules, these same trusts will be required to report the new information and file a trust return each year, even if the trust has no income and previously was not required to file. There are some exceptions to the reporting requirements, but most inter-vivos and testamentary trusts will fall outside of the exemptions. For a detailed list of the exceptions, see the appendix to our February Tax Alert, “Trust reporting in 2021 will come sooner than you think.”
This trust reporting will lead to additional accounting and legal fees due to increased annual compliance. The filings will also require more time from the trustee or executor in collecting complete and accurate information. It is the administrator’s responsibility to gather the information set out in the new reporting requirements. Obtaining current addresses, date of birth, jurisdiction of residence and taxpayer identification number can be difficult if left to the last minute.
A review of the benefits and the additional costs should be evaluated to determine if the trust continues to provide value and make economic sense. The time to act is now before the reporting requirement is upon us.
Take action
Administrators seeking to be proactive should contact their Baker Tilly advisor as soon as possible to go over possible strategies prior to Jan. 1, 2020.
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