Issued on March 19, 2019, the 2019 Federal Budget (“Budget 2019”) confirmed the government’s intention of implementing new annual trust reporting requirements, a measure originally announced in the 2018 budget.
As part of the 2018 federal budget, it was proposed that all express trusts (with very limited exceptions) be subject to more vigorous reporting requirements starting in 2021. Specifically, all express trusts that are resident in Canada will now have to file a T3 Trust Income Tax and Information Return (“T3 Return”) even if they were not previously obligated to do so. An express trust is defined by the Canada Revenue Agency as: “a trust created with the settlor's express intent, usually made in writing (as opposed to a resulting or constructive trust or certain trusts deemed to arise under the provision of a statute).”
As such, in 2021 all express trusts filing T3 Returns – including non-resident trusts currently filing T3 Returns – will need to report the identity of all trustees, beneficiaries and settlors of the trust as well as all persons who have the ability (through the trust’s constitutive document or otherwise) to exert control or override trustee decisions over the allocation of income or capital of the trust (for example, a protector).
In addition to the names of these persons, it will also be necessary to report:
- their addresses;
- dates of birth;
- jurisdictions of residence; and
- taxpayer identification numbers (i.e. social insurance number, business number or account number).
Harsh penalties will be imposed on trusts that fail to meet the new reporting obligations. The penalty will be equal to $25 per day of delinquency, with the minimum penalty being $100 and the maximum penalty being $2500. In addition, if the failure to meet these new requirements is made knowingly or due to gross negligence, an additional penalty equal to 5% of the maximum value of property held during the relevant year by the trust will be imposed, with the minimum being $2500 in addition to the normal delinquency penalty.
The measures to increase trust transparency come as no surprise since the Federal government is working at combatting money laundering, terrorist financing and complex tax avoidance schemes. Trusts will also be impacted by impending changes to record keeping for companies incorporated under the Canada Business Corporations Act (“CBCA”) (see New record-keeping requirements under the Canada Business Corporations Act: A primer). Under the new CBCA provisions, which will come into force on June 13 of this year, federally incorporated businesses will be required to keep registers of individuals with significant control of the corporation (for a definition of individuals with significant control, please see the above article). Although these registers are not available to the public, the Director of Corporations Canada, as well as creditors and shareholders of the corporation in permitted circumstances, will have access to this information on request. As such, if a trust has significant control of a CBCA corporation, that corporation will be obligated to keep a register of the individuals within the trust that can exercise control over the corporation.
The new rules will lead to significant uncertainty since factual control of a trust (and of a related corporation) may reside in the trustees, the beneficiaries or the person appointed in the trust deed to appoint replacement trustees. As there is no clear delineation of factual control within the CBCA provisions and no draft regulations have yet been released, it will be important for corporations and trusts to work together to determine who within the trust context is actually making the decisions which impact the corporation (i.e. who has the factual control). The penalties may be onerous so caution and care is advised. If restructuring is required, there is presently a two year window to make changes.