New Trust Reporting Requirements: It’s Almost Time

UPDATE (Jan 15, 2022): The CRA announced on January 14, 2022 that the trust reporting and filing requirements will not apply to 2021 T3 returns. The CRA has indicated it continues to work on the legislation and the new requirements will apply once the legislation has received Royal Assent. We will provide further updates as we get them.

Budget 2018 announced, and Budget 2019 confirmed, that trust reporting requirements are changing in 2021. While it may have felt far away at the time, 2021 is now almost upon us. If they have not already, it is time for trustees to start thinking about the implications of these changes. They need to ask themselves, are the benefits of a trust worth the effort and risks?
The new reporting requirements

The proposed changes primarily affect express trusts, that is trusts created by specific intent, usually in writing. As it stands right now, these trusts are generally only required to file if certain circumstances arise during the taxation year, for example if the trust earns income, disposes of capital property, or makes distributions to beneficiaries. In other words, if nothing changes for the trust then nothing is reported. 
Starting in 2021, except for a few specifically exempted types of trusts (such as mutual fund trusts or trusts that qualify as registered charities), express trusts resident in Canada must:

  1. file income tax returns annually in the form of a T3 Trust Income Tax and Information Return (T3);
  2. report all the settlors, trustees and beneficiaries of the trust; and
  3. identify any persons who exert control over the trustee’s decisions concerning income and capital (“protectors”).

This new information will be filed as a new schedule (yet to be released) with the T3. The information reported on the settlors, trustees and beneficiaries includes each individual’s taxation identification number (usually their social insurance number), birth date, address and jurisdictions of residence.
Increased risks associated with the new reporting requirements

Failing to comply with these new requirements can mean harsh penalties. Filings that are late or fail to provide the required additional information are penalized $25 a day for each day the filing is late, from a minimum of $100 to a maximum of $2,500. Additionally, if the failure was made knowingly, or due to gross negligence, an additional penalty of 5% of the maximum value of the trust property (minimum $2,500 penalty) will apply. 
Collecting this information may be an extremely onerous process, especially where there is a broad group of beneficiaries, so consider starting the process sooner rather than later.

Further, this change could have much further reaching implications.
Once the CRA has this information, a whole new set of other potential taxation issues arise. For example, the increased availability of beneficial ownership information of corporations means the CRA can crack down on related shareholders and associated corporations. Theoretically, beneficiaries of trusts that they did not even know existed could now be facing major tax implications from association rules. 
As a result, this could impact a trustee’s obligation to disclose the existence of a trust to beneficiaries.

In Valard Construction Ltd. v. Bird Construction Co, 2018 SCC 8, the Supreme Court held that a trustee’s fiduciary duty includes an obligation to disclose the existence of a trust to a beneficiary wherever a beneficiary would be unreasonably disadvantaged not to be informed of its existence. While this case arose in the commercial context, the case has already been cited for its general principles of trust law in other contexts.
If a court were to hold that unforeseen tax consequences to a beneficiary taxpayer were an unreasonable disadvantage due to not being informed of the existence of a trust, the trustee could be personally liable for a breach of its fiduciary duty. 
Trustees should, therefore, consider disclosing the existence of trusts now to any beneficiaries, including discretionary beneficiaries, that are currently unaware they are beneficiaries.

Given the above, trustees should consider whether it would be preferable to wind up their trusts. There are many reasons, including tax reasons, why parties will continue to use trusts. However, many of the tax advantages of using trusts have been eliminated over the last several years and family circumstances will have changed. Added with the hassle and risks associated with the new reporting requirements, some trusts settled several years ago may no longer make sense.

These conversations must happen soon so restructuring can be completed before the next taxation year begins.
The lawyers from the Wills and Estates Group would be happy to assist you in determining whether it makes sense to continue any trusts and/or assist with any reorganization or wind-up which may be advisable.