Notify your clients of the new rules for declaring trusts

“There’s a lot of consultation and confusion around the rules,” said Rebecca Hett, vice-president of tax, retirement and estate planning at CI Global Asset Management in Calgary.

The government first proposed tougher reporting rules for trusts in the 2018 federal budget as part of its wider efforts to tackle aggressive tax planning, tax avoidance and money laundering. The rules were supposed to take effect on December 31, 2021, but the measure never passed.

On February 4, 2022, the Ministry of Finance published a draft law to implement new proposals, this time simple trusts (bare trust) within their scope. Simple trusts are arrangements where the sole obligation of the trustee is to transfer property to the beneficiary upon demand. These trusts are typically used to facilitate efficient estate transfers, reduce or avoid state estate transfer taxes or probate fees, and provide privacy. Generally, simple trusts are not used for income tax planning.

The Ministry of Finance published a revised draft law in early August without any major changes. The comment period ended on September 30. If passed, the rules would apply to trusts with a fiscal year ending on or after December 31, 2022.

Lindsey MacCarthy’s partner in Calgary, Katherine Ratcliffe, said it was “disappointing and disappointing” the government’s failure to address the concerns of tax practitioners in the revised draft legislation, particularly the inclusion of bare trusts. “It gives the impression that the consultation process is not sincere at all,” he said Investment Executive.

If the bill is passed this fall, tax professionals and taxpayers will face “tremendous stress” as they scramble to identify and prepare tax returns for all existing simple trust arrangements before the March 31, 2023 filing deadline.

“Get all names [des bénéficiaires]make sure everyone has it, it will be an added cost with no benefit [pour les clients] says Keith MacIntyre, tax partner at Grant Thornton in Halifax.

“Want to [l’Agence du revenu du Canada (ARC)] had standard forms and we were able to integrate them today, search our database to help identify customers affected by the proposed new rules,” he says.

In response to emailed questions about how the CRA was preparing for the new trust reporting regime, the agency said it would “administer the new reporting and filing requirements once the legislation receives Royal Assent and will continue to administer existing trusts in accordance with existing legislation.”

When asked if the CRA planned another delay in implementing the rules, the agency responded that it “will not comment while this bill is in draft.”

Some customers may not realize how the new rules may affect them. For example, a bank account opened by a parent for the benefit of a minor child or an account in which an adult child is added as a joint owner with a parent may be considered a simple trust agreement and therefore a declaration of trust. and related reports should be prepared.

“It seems to me that such arrangements are covered by simple trust definitions in the proposed legislation,” analyzes Rebecca Hett.

Keith MacIntyre believes that improved disclosure rules will have a significant impact on the privacy use of trusts that an individual may want for legitimate non-tax reasons. A settlor, for example, may not want a family member to know that a trust is named as a beneficiary. However, in order to comply with the new rules, trustees will need to obtain information from the relevant persons, thereby informing them that they are indeed beneficiaries. “Privacy has become a very important issue now.”

The new rules, if adopted, could change the way trusts are designed.

Today, for example, advisors often recommend that their clients create a discretionary family trust to designate a wide variety of beneficiaries for tax and estate planning purposes. This gives trustees great flexibility in determining when and to whom distributions can be made.

If the proposals are accepted, “there will be a tendency to be more intentional with the named beneficiary,” Katherine Ratcliffe comments in an interview.

The new reporting rules will also allow the CRA to be more transparent, including improving its ability to confirm that corporations fail to report the correct allocation of the $500,000 small business deduction.

according to income tax law, each beneficiary of a discretionary trust is deemed to own all the stock of the corporation held by that trust for purposes of the related corporation rules. If any of these beneficiaries owns a corporation, the trust owns taxable capital, or shares in the corporation that exceed the passive investment income threshold, their ability to access the small business deduction may be reduced or eliminated.

The improved disclosure rules don’t reflect a legislative change, but buyers can “no longer sit in the sand” so they don’t know about the issue, notes Kenneth Keung, Canadian tax advisory director at Moodys Private Client Law. In Calgary. In this sense, when setting up trusts, people should be more careful about who they name as beneficiaries. »

The CRA already has information on any income or gains related to property held in trusts, and beneficiaries must still report these amounts on their personal tax returns. However, the expanded reporting rules would allow the government to obtain more detailed information about trusts and beneficiaries.

“There are really malicious people who do malicious things with simple trusts to hide the settings on purpose,” said Kenneth Keung.

However, Keith MacIntyre suggests that compliant taxpayers are being unfairly and unnecessarily asked to pay a price for failing to prevent improved reporting.

“It’s a huge burden on the taxpayer,” he says.

Proposed rules for Trevs in detail

The proposed regulations would require trusts with a taxable year ending on or after December 31, 2022 to file an annual trust income tax return and list all beneficiaries, trustees, settlors, or protectors of the trust, including their address, date of birth, and taxpayer identification number. requires identification. . Under current law, trusts that only have taxes due for the year or that dispose of capital property must generally file an annual trust return.

Certain trusts are excluded from the scope of the proposed regulations. These include mutual fund trusts and registered plans, trusts that have been in existence for less than three months, and those with assets of less than $50,000 – provided that those assets consist only of cash and securities traded on a designated exchange (and other) don’t be. defined assets).

In addition to existing penalties for failure to file a declaration of trust, the proposed filing rules impose a new penalty for willful failure to file or gross negligence: $2,500 or 5% of the value of the estate, whichever is greater.