Over 90 jurisdictions have committed to the OECD's Common Reporting Standard (CRS), creating comprehensive global automatic information exchange for financial assets and the entities through which such assets may be held.

Over 70 jurisdictions have signed the OECD's Multilateral Competent Authority Agreement, which implements the CRS. The CRS is scheduled to start in over 50 of those jurisdictions on January 1, 2016 for accounts in existence on December 31, 2015. The remaining committed jurisdictions, including Canada, will follow a year later with implementation commencing in 2017. The OECD released an Implementation Handbook, including a chapter on trusts, on August 7, 2015 to provide further guidance on CRS.

In our previous article on privacy, we also noted transparency initiatives in the EU and the UK on disclosure of beneficial owners of UK and EU companies (and trusts in certain circumstances), and that the UK is demanding its Crown Dependencies and Overseas Territories to follow.

This article summarizes CRS reporting for trusts in the private wealth and estate planning context.

Objectives and obligations

The FATCA-inspired CRS is designed to tackle international tax evasion by establishing the annual automatic transmission of bulk taxpayer information. Financial institutions are required to (i) conduct due diligence on financial accounts to identify account holders who are tax resident in participating jurisdictions; and (ii) report information on these accounts to their domestic tax authority which will then automatically transmit that information directly to the tax authorities of participating jurisdictions where account holders are tax resident.

Trusts: What will be reported?

The CRS will generally apply to a trust that is a: (i) reporting financial institution, and (ii) "non-financial entity" (NFE) that maintains a financial account with a reporting financial institution.

Where a trust qualifies as a reporting financial institution, the trustee will be required to report the relevant information on reportable persons with a debt or equity interest in the trust, such as settlors, beneficiaries, and any other natural person exercising ultimate effective control over the trust. A trust will generally be characterised as a financial institution where the trust is an investment entity that has gross income arising primarily from financial assets and the trust is managed by another financial institution. A trust will be a reporting financial institution if the trustee resides in a jurisdiction that is participating in CRS. Where a settlor, beneficiary or other person exercising ultimate effective control over the trust is an entity there is a 'look through' to identify the ultimate natural controlling persons of that entity.

However, if a trust qualifies as a passive NFE, the trustee will not report on those persons, but the financial institutions where the trust has financial accounts will report on the controlling persons of the trust. A trust that is not a financial institution will qualify as either a passive or active NFE. In this event, unless a trust carries on an active business or is a registered charity (under certain conditions), a trust will likely be a passive NFE.

TRUST IS A FINANCIAL INSTITUTION

For a trust that is a reporting financial institution that is an investment entity (i.e., professionally managed), the debt and equity interests of the trust are reportable accounts if they are held by a reportable person. For example, if a settlor or beneficiary is resident in a jurisdiction that is participating in CRS, their interest in the trust is a reportable account. Where a trust is a reporting financial institution, the trustee will need to report significant account information in respect of each reportable person including:

  1. For settlors - their identity, the value of their interest in the trust and any payments made to the settlor;
  2. For discretionary beneficiaries - their identity and the value of distributions made to a beneficiary for years in which the beneficiary receives a distribution from the trust (for a mandatory beneficiary - their identity, the total value of their interest in the trust and distributions made to the beneficiary);
  3. Any other natural person exercising ultimate effective control - their identity, the total value of their interest in the trust and any distributions made to them; and
  4. Where any of the persons in a. to c. is an entity - the relevant information noted above for each natural controlling person of the entity. The OECD's Implementation Handbook notes that, at a minimum, a trustee will exercise ultimate effective control over a trust (paragraph 214). This suggests that reporting will be required to the jurisdiction where the natural controlling persons of a corporate trustee reside. Is this intended? Consider a trustee owned by a small group of individuals. Will the value of all trusts administered by their trust company be reported to their tax authority?

An individual's address, date and place of birth and taxpayer identification number (TIN) are also provided to fully identify the individual. With respect to the value of a person's interest in a trust, the OECD's Implementation Handbook suggests that it may be the total value of the trust fund (paragraph 222).

TRUST IS A PASSIVE NFE

In the event that a trust is a passive NFE (because it is not managed by a professional) the trust is not required to report on its settlor and beneficiaries. However, the financial institutions with which the trust holds financial accounts will report to the jurisdictions where the trust resides and where the controlling persons of the trust reside. For a trust, controlling persons means (irrespective of whether an individual has control over a trust): the settlor, the trustee, the protector, the beneficiaries, and any other natural person exercising ultimate effective control over the trust. The financial institution is required to report the following information on the settlor, trustee, mandatory beneficiaries and the protector: their identity, the total account value and any payments to them. Jurisdictions can elect to treat discretionary beneficiaries in the same manner as noted above. Where any such person is an entity, the financial institution needs to identify and report on the natural persons controlling that entity.

Canada

Canada signed the OECD's Multilateral Competent Authority Agreement on June 2, 2015 after committing to implement CRS in the April 21, 2015 Federal Budget. CRS is scheduled to start in Canada on July 1, 2017, with the first information exchange in September 2018.

The Canadian FATCA IGA is being challenged before the Canadian courts as being unconstitutional (because it violates the Canadian Charter of Rights of Freedoms) and for non-constitutional reasons (because disclosure under the IGA is inconsistent with the provisions of the Canada-U.S. Tax Treaty and section 241 of the Income Tax Act). The Federal of Court of Canada dismissed the non-constitutional challenge in a decision rendered on September 16, 2015 in Hillis and Deegan v. The Attorney General of Canada (2015 FC 1082). The decision was affirmed by the Federal Court of Appeal on September 30, 2015. The plaintiff is permitted to continue to pursue the constitutional challenge, which is ongoing.

Is the United States a participating jurisdiction for CRS purposes?

The CRS defines a passive NFE to include certain investment entities not resident in a participating jurisdiction. As noted above, a financial institution adopts a 'look through' approach to controlling persons where the account holder is a passive NFE. If the U.S. is not treated like a participating jurisdiction, then non-US financial institutions will need to identify controlling persons of U.S. entity account holders and report directly to their jurisdiction of residence. The implementing legislation in each country will likely determine whether the U.S. qualifies as a participating jurisdiction for that country.

What should clients do?

  1. Clients should actively regularize their tax affairs, including through voluntary disclosure regimes. This will likely be more favourable than being audited.
  2. Clients should confirm the tax efficiency and reporting obligations associated with their current wealth structure.
  3. Clients should consider the scope of information that will automatically be reported to their home country and whether this information will be consistent with their domestic reporting obligations.