Trust Reporting Rules: Draft Legislation and Impact on Estates

As discussed in our February article, the Government has provided draft legislation for the new trust reporting rules. In addition to the overall effect these changes may have on commercial and real estate transactions, they will also impact Estate Administration and Estate Planning.

Refresher

The new reporting rules require trustees and Executors[1] 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 rules were initially intended to apply for 2021. However, this has now been pushed back and will apply to trusts with taxation years ending after December 30, 2022.

Impact of Reporting Rules on Administration of an Estate

Wills create testamentary trusts which form your Estate, with your Executor acting as the trustee. This means the new reporting rules will impact the obligations of Executors managing any Estates with taxation years ending after December 30, 2022.

Many Estates will be able to opt out of these rules by designating the testamentary trust to be a graduated rate estate (“GRE”).[2] However, there can only be one GRE for each deceased individual. If there are multiple testamentary trusts created under a Will, the Executor will need to choose which of those trusts should be designated as a GRE.

After designating the Estate as a GRE (assuming there is only one testamentary trust), be aware that GREs have a limited life of 36 months from the date of death. Therefore, any Estates lasting more than 36 months cease to qualify as GREs. This may occur if there is an ongoing dispute that cannot be resolved within those 3 years or if the Will provides for a trust for minor children that extends beyond 3 years from death. In these cases, the Estate will eventually fall within the trust reporting rules.

We recommend the Executor gather the reportable information from the beneficiaries at the outset of estate administration. Among the many things that an Executor must attend to (see here for a timeline), they will also be responsible for filing the tax returns and the deadlines for this can creep up quickly. Ultimately, the Executor may not need this information but they will not be able to determine this until after the Estate administration is underway. The Executor may work together with their tax advisors to determine whether the Estate can be designated as a GRE and proactively track when it will cease to be a GRE.

Impact of Proposed Bare Trust Rules on Estate Planning

As we noted in February, one surprise in the draft legislation is that it includes bare trusts under the new reporting rules. Bare trusts are where a “bare trustee” holds legal title to property but the beneficial owner will have actual control and beneficial rights to the property. The bare trustee is bound to follow all instructions from the beneficial owner. This relationship is similar to an agent/principal relationship.

From an estate planning perspective, if bare trusts are included under the new reporting rules, it will restrict their benefits as an estate planning tool. Bare trusts are often used by parents who wish to add their children as joint tenants on land titles or as joint owners on bank accounts. This is done as a simple solution to give “signing authority” to a child and to avoid needing a Grant of Probate when the parents die. Sometimes, the desire to avoid the Probate process is due to cost concerns while other times it is a desire to preserve privacy.

Although they are listed as “joint owners”, the children’s roles are often restricted to “bare trustees” on behalf of their parents.[3] The parents receive all benefits and pay all expenses of the property, and the parents will make all decisions with regards to the property. At death, the property will go to the children by right of survivorship thereby avoiding the Probate process (though not the deemed disposition of the property triggered at death for tax purposes).

We’ve previously discussed why a bare trust and joint tenancy may not be the best route but, nonetheless, it offers a simple and straightforward option that works for certain scenarios. However, if bare trusts will need to start filing tax returns and reporting detailed information on the individuals involved, it will erode the appealing simplicity of this tool. Additionally, failure to report carries penalties which defeats the goal of mitigating cost concerns.

It is not clear whether the government will maintain the broad inclusion of bare trusts into the new reporting requirement rules. Our hope is that bare trusts will be excluded from the reporting rules or at least limited to only specific situations. The draft legislation remains open for comments until April 5, 2022.

Our Estates & Trusts and Taxation lawyers would be happy to assist you with your estate and tax questions. Please contact a member of our team.  

[1] 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).

[2] 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.

[3] Caselaw has suggested that the assumption is a child on title for an elderly parent is acting as a bare trustee, unless there is clear evidence to show the parent’s intention was to actually transfer ownership.