Trust Reporting Rules (Draft Legislation): Overview and Recommendations

Update: Effective date for the trust reporting rules has been pushed back to December 30, 2023.

The Government has now provided draft legislation for the trust reporting rules which will be open for comments until April 5, 2022. These include new rules applicable to bare trusts, which can have far reaching and significant implications.

We have discussed the proposed reporting rules for trusts before. As a refresher, these rules require trustees[1], which includes Executors, to file a trust tax return each year and report detailed information of the settlor, trustees, beneficiaries and any person who can exert influence over the trust (i.e. protectors). The details to be reported for these persons are:

  • Name
  • Address
  • Date of birth (in the case of an individual other than a trust),
  • Jurisdiction of residence
  • Taxpayer identification number

These proposed reporting rules aren’t all that new. They were initially part of the 2018 budget and were slated to come into effect in 2021. Then, in early 2022, Finance announced that the application of the rules will be delayed another year. However, Finance has only now released the draft legislation which includes several notable items.

  1. The new rules will now apply to trusts with taxation years that end after December 30, 2022 (UPDATE: December 30, 2023).
  2. The reporting and tax return filing obligations will include “bare trusts”, meaning those where the trustee is effectively an agent for the beneficiaries.[2]
  3. In addition to the other exceptions,[3] there is a subsection that confirms that information protected by solicitor-client privilege will not need to be disclosed.[4]
  4. There is some clarification of the reporting obligation for beneficiaries who are not yet ascertainable (e.g. grandchildren who are not born yet). The trustee must provide information on “each beneficiary of the trust whose identity is known or ascertainable with reasonable effort”. However, if the beneficiary cannot be ascertained, then the trustee must provide sufficient information to “determine with certainty whether any particular person is a beneficiary of the trust.” Then again, what counts as “reasonable effort” and “with certainty” will undoubtedly be up for debate.

Application to bare trusts is concerning

Bare trusts are used regularly in corporate and commercial transactions when it is inconvenient or impossible to transfer legal ownership on the desired timeline. Some of these are only in place temporarily, allowing extra time for the actual transfer of legal ownership.  Others stay in place long term for convenience. 

Bare trusts are also used regularly by individuals for personal convenience. Parents will co-own a house so their children can qualify for a mortgage or children will become co-owners of their elderly parents’ accounts or home so they can assist them in managing their property. 

The main appeal of using bare trusts is that it is a simple solution. However, if bare trusts will need to start filing returns and reporting information, this will add a significant administrative burden and risk of penalties as many people may be using bare trusts without realizing it.

It's also not clear why the Government wishes these rules to apply to bare trusts. A bare trust has traditionally been ignored for tax purposes, with the beneficial owner required to do any reporting for the relevant assets or income.  Therefore, it is not clear how the existence of a bare trust will effect tax liability. This is in contrast to other trusts which are treated as separate entities for tax purposes and may be subject to certain rules, like the rules related to “association” of entities.

What is clear, however, is that with such extensive information reported for all forms of trusts, the CRA will likely be able to more easily enforce many tax provisions as a result of the proposed changes.

Some of the required information may be difficult to obtain

Of additional concern, the requested information may be difficult to obtain in some cases. For example, many family trusts were settled by a family friend or acquaintance who then ceased to have any connection to the trust. In some cases, obtaining the personal information of these individuals at this later date will be extremely inconvenient if not impossible.

Likewise, expansive lists of beneficiaries may include beneficiaries who it will be difficult to obtain the requested information. Further, in some cases the trustees may not want the beneficiary to know they are a beneficiary, especially in the case of conditional beneficiaries who are not actually expected to benefit from the trust at all.

There is still time to avoid these rules

While these reporting rules are still in the consultation phase, it is nearly certain that they will be implemented in some shape or form. [5] Luckily, there is still time to prepare for the application of these rules.

We recommend the following:

  • Trusts should be identified – this is especially important for bare trusts which are often forgotten or minimally documented.
  • Where the trust no longer serves a purpose, it should be wound-up.  This is especially the case with bare trusts where they often are not needed, or where an agency agreement or power of attorney may be preferable.
  • Where a trust still makes sense, the personal information of all the relevant persons should be gathered so it is readily available.

This article is the first of a two-part series. Next month, we will delve into the specific impact of these proposed rules on Executors, estate administration and estate planning.

Our Estates & Trusts and Taxation teams are available to answer any questions you have on these rules, tax law in general, or your estate plans. 

[1] Technically, the obligation will be imposed on “every person having the control of, or receiving income, gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity” (section 17 in the proposed legislation).

[3] Exceptions for the reporting requirements include: trusts less than 3 months old; trusts that hold only certain assets worth $50,000 or less; registered charities and not-for-profits; mutual fund trusts; graduated rate estates; qualified disability trusts; employee life and health trusts; and certain registered or employee trusts.

[4] See section 15 in the proposed legislation and explanatory notes.