Trust Law 101
In order to create a trust, a “settlor” must make a gift of property. The gifted property is known as the “settled property”. The settlor gifts the settled property to the “trustee(s)”. The trustees must hold the property for and on behalf of one or more persons known as the “beneficiaries”.
In order to create a trust, a “settlor” must make a gift of property. The gifted property is known as the “settled property”. The settlor gifts the settled property to the “trustee(s)”. The trustees must hold the property for and on behalf of one or more persons known as the “beneficiaries”.
Current Reporting Rules for Trusts
Presently, a trust can generally avoid the obligation of filing a tax return in respect of a particular year where there is no tax payable in the year and there is no taxable capital gain arising from the disposition of property in the year.
New Reporting Rules for Trusts
Recent amendments to the Income Tax Act (Canada) (the “Act”) and the Regulations expand the trust reporting regime for taxation years that end December 31, 2021 or later. Starting with the December 31, 2021 tax year, all “express trusts”, unless specifically excepted, are subject to new reporting rules. An “express trust” is generally understood to be a trust arising and settled by a settlor with a clear intent to settle property for the benefit of the beneficiaries of the trust. An express trust would include a typical discretionary family trust.
Under the new reporting rules, express trusts (which are referred to as “Additional reporting trusts” in the heading of new Regulation 204.2) will file income tax returns annually, whether or not they have income. Moreover, these “Additional reporting trusts” must also provide additional information to the Canada Revenue Agency (the “CRA”), being the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and “taxpayer identification number” for:
- Each trustee;
- Each settlor (defined in the Act to mean a person who has transferred or loaned property to the trust except where there is an arm’s length relationship with the trust and (a) any such loan was made at a reasonable rate of interest, or (b) any such property transfer is made for fair market value consideration);
- Each beneficiary; and
- Each person who has the ability (through the terms of the trust or a related agreement) to exert influence over the decisions of the trustee(s) regarding the appointment of income or capital of the trust (for example, a protector).
The obligation to gather this information is imposed on every person “having control of, or receiving income, gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity”.
Exceptions to the New Rules
There are several trusts listed in the Act that are “exception trusts”, and do not have to comply with these new reporting requirements. Notable among these exceptions are the following:
- A registered charity;
- A trust in existence for less than 3 months at the end of the year;
- Trusts holding only cash, government bonds, and portfolio securities with a fair market value of $50,000 or less;
- Graduated rate estates;
- Qualified disability trusts;
- Employee life and health trusts; and
- Registered plans (for example, RRSPs, TFSAs, etc.).
Penalties
If the required reports are not filed with the CRA, then penalties can be assessed. The penalty will be equal to $25 per day with a minimum penalty of $100 and a maximum penalty of $2,500. If a failure to file the return and fulfill the reporting obligations was made knowingly, or due to gross negligence, an additional penalty will apply. The additional penalty will be equal to 5% of the maximum fair market value of property held during the relevant year by the trust, with a minimum penalty of $2,500.
Considerations and Challenges
Beneficiaries:
Gathering the requisite information regarding “beneficiaries” could, in some circumstances, be problematic. Depending on how the “class” of beneficiaries is defined in the trust document, it may be challenging to identify and locate all beneficiaries.
Settlors:
The term “settlor” is also more expansive than simply identifying the person in the trust document who “settled” (i.e. gifted) property to the trustee(s). The definition of “settlor” for the purpose of the new reporting rules is noted above.
Association:
With the new identification reporting rules, it may become easier for the CRA, using the data collected, to discover an inadvertent association of two or more corporations. Consider the following association rules under the Act:
- If a family trust is the sole common shareholder of a corporation, it is deemed to control that corporation;
- Each beneficiary of a discretionary family trust is also deemed to control the corporation in question;
- If a beneficiary of the trust is under 18 years of age, then each parent of that particular beneficiary is deemed to control the corporation in question.
Consider the following example using the above-noted association rules:
Mr. and Mrs. Smith own the voting shares in a corporation (“Smithco”) that runs a Saskatchewan family business. A discretionary family trust (the “Smith Family Trust”) owns the common shares in Smithco. Mr. and Mrs. Smith’s children and grandchildren are beneficiaries of the Smith Family Trust. Under the new trust reporting rules, the Smiths have reported the identification information of the beneficiaries.
Jason, the son of Mr. and Mrs. Smith, marries Jenny, the daughter of Mr. and Mrs. Jones. They have two children together, both of whom are under 18 years of age.
Unbeknownst to Mr. and Mrs. Smith, Mr. and Mrs. Jones have their own family business. Mr. and Mrs. Jones own the voting shares of a corporation (“Jonesco”) that operates a Nova Scotia family business. Like the Smith family, a discretionary family trust (the “Jones Family Trust”) owns the commons shares in Jonesco. The Jones’s children and grandchildren are the beneficiaries of the Jones Family Trust. The Jones family have also reported the identification information of the beneficiaries.
Smithco and Jonesco are associated under the Act (which means, among other things, that they have to share the small business deduction) because of the “link” provided by Jason and Jenny’s children. However, the Smith family and Jones family, who operate entirely separate businesses, are completely unaware of such association. The CRA, on the other hand, now has the data to readily connect the dots between Smithco and Jonesco.
Going Forward
You may wish to reach out for professional advice to discuss compliance with the upcoming trust reporting rules. Now may also be an opportune time to tidy up your family trust to address and remedy any unintended associations issues. Our firm would be happy to assist in this regard.
Jessi Brockman
STEVENSON HOOD THORNTON BEAUBIER LLP
500-123 2nd Avenue S, Saskatoon, SK S7K 7E6
Telephone: 306-244-0132
Email: jbrockman@shtb-law.com
The information in this guide is not legal advice. We encourage you to consult with your legal advisor for specific advice.