New trust reporting rules on their way

Trusts are getting more transparent.

Since 2018, the Federal government has been planning to chip away at the privacy of a wide variety of trust types. Legislation originally slated to come into force last year dramatically increased the amount of information they must turn over to the Canada Revenue Agency, including the identities of all trustees, beneficiaries and settlors.

However, the latest set of draft rules will be of particular interest to those with wills, because they propose to extend the new reporting and annual tax return requirements to bare trusts, in a move that surprised many estates law practitioners. 

One of the simplest forms of trust that exists, a bare trust allows a beneficial owner to retain ownership and control over a property while someone else holds the legal title. They are frequently used by testators who want to minimize the probate tax payable on the transfer of a home or cottage to a beneficiary, without the hassles and risks that come with holding property jointly with that person during their lifetime. 

Historically, most trusts were typically excused from annual tax filing requirements, because T3 returns were only needed when trusts owed tax or made distributions to beneficiaries. 

If the latest draft rules do go into effect as currently written, the reporting requirements will apply to the taxation year ending Dec. 31 2022. That means the first T3 returns will be due by March 2023, although there will be exemptions for bare trusts that existed for less than three months in the tax year or that hold less than $50,000 in cash only.  

Trustees will have good reason to take their reporting obligations seriously, with penalties for non-compliance accumulating $25 per day up to a maximum of $2,500. But the fines take a big jump if false statements in the document or the failure to file were done knowingly or as a result of gross negligence: then the penalty is calculated as the greater of $2,500 or 5% of all assets in the trust.

The obligations these new rules impose on trusts are relatively onerous – especially compared with the status quo – and some people may prefer to wind up their existing trust arrangements if privacy was a key feature for them, or if they will struggle to get all the necessary information together in time to comply.

Whether you already have trusts in place as part of your existing estate plan or you’re thinking of setting them up, an experienced estates lawyer can help you assess your options and meet your reporting obligations. 

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