EU-Paris

In Canada, trusts have long been considered a mainstay of sound estate planning. In Europe, that might change. Over the past year, European legislators have debated proposals that would require public disclosure of all beneficiaries of all trusts domiciled within EU member states. Some say disclosure is an important weapon in the fight against tax evasion. Others believe it’s an unnecessary intrusion of the state into private financial affairs.

While a compromise has settled the issue for now—member states have to collect information on the beneficial owners of trusts, but those details will not be made public—the debate raises questions about whether such disclosure may one day be required in Canada.

The framework

Margaret O’Sullivan, principal, O’Sullivan Estate Lawyers, says the push to make trusts public is “part of this greater move toward more transparency—to try to [stem] leakage from the tax system, ensure better tax compliance, [and] stop tax evasion [and] criminal terrorist financing.”

But what was originally a laudable notion has quickly turned political. “Originally, the idea was that they were combatting money laundering and terrorism—who can object to that?” she says. “Then taxes got added on. Now [it’s about] tax evasion, and tax evasion morphed into tax avoidance.”

As O’Sullivan explains, the zeal about going after tax cheats ignored the many legitimate reasons for citizens to keep trusts private. “Trusts are used by all sorts of people [to protect] minors, the disabled [and] vulnerable beneficiaries,” she explains. “[But EU legislators] see these as tools that aid the rich and help them avoid, and sometimes evade, tax.”

By ignoring privacy needs, the original EU legislation left the door open to harassment and financial abuse of trust owners. “It might [have] led to the ability to identify people of potential high net worth,” O’Sullivan says. “[That] could lead to a lot of issues. Perhaps even those who are most vulnerable being potentially taken advantage of. A scam artist [might be] able to identify trust beneficiaries and then target them because he or she knows that person may be in receipt of substantial funds.”

Different systems; different laws

Albert Oosterhoff, professor emeritus at Western University’s Faculty of Law, sees the EU’s debate over trust disclosure as an example of the friction that can arise between different legal systems. “There is a significant difference between the common law trust and the quote-trust-unquote that exists in civil law jurisdictions,” Oosterhoff notes.

Since the legal concept of a trust is not native to the civil law jurisdictions of many EU member states, he explains, legislators in those states see a legitimate public interest in making trusts part of the public record. Meanwhile, in the EU’s common-law jurisdictions, legislators recognize that privacy has been a central trust feature for hundreds of years.

While Oosterhoff acknowledges the debate makes for an interesting academic discussion, he says it won’t change much for most Canadians. “Brussels, [for instance], does not have jurisdiction over private Canadian trusts,” he says. “There are always [tax] issues [with] beneficiaries living all over the place. But for the typical Canadian family trust, I don’t think it’s a big concern.”

And what about the big question: Could something like the original EU proposal one day be introduced here in Canada?

“I would think not,” Oosterhoff answers emphatically. “There are always incremental changes in the rules—in tax [rules] especially. And certainly, as far as charitable trusts are concerned, there are disclosure requirements. But beyond that, I really can’t see significant changes coming down the pike.”

He adds, “There would be a huge uprising if trusts were to be made public, because it just runs counter to everything we’ve always known about trusts. Trusts are meant to be private, and should be kept private.”

Oosterhoff points to the fallout from the withdrawal of tax-advantaged status from income trusts as roughly analogous. Back in 2006, faced with mounting revenue losses as more corporations converted to income trusts, the Conservative government announced a new 34% tax on trust distributions. “The announcement caused much consternation and criticism,” he recalls.

So, Oosterhoff says, the fallout resulting from any change to trust law would be even more disruptive, and subject to more serious opposition from both professionals and the general public, because the existing trust structure has been around for centuries.

How to talk about trust disclosure

If your clients have European-domiciled trusts, they may be wondering what the new EU trust disclosure laws mean for them. Here are some topics to address:

  1. Explain what’s public (and what’s not public)

    Providing an overview of the difference between corporate beneficiaries (public) and trust beneficiaries (private) will strengthen the argument that trusts are still part of a sound estate plan.

  2. Suggest a tax and/or estate review

    Now is the time to go over the tax implications of the new disclosure requirements on the client’s current finances.

  3. Warn about further evolution

    The AMLD has evolved considerably over time. While the issue of trust disclosure has been settled for now, it’s possible the issue will be re-opened in the future.

No place to hide

O’Sullivan agrees the European proposals are unlikely to be adopted here anytime soon. “[For] people managing their affairs in a proper way”—fully compliant with legal and tax regulations—“I don’t think there are huge [implications] going forward,” she says.

However, she says the EU disclosure debate reminds us that financial privacy is increasingly under siege. “Perhaps we can’t be quite as confident that trusts are essentially private arrangements—a piece of paper and nobody has any right to disclose it,” she muses.

“The lesson is that in this world that we [live] in, there’s no place to hide. There’s no place where you can keep things secret.”

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MICs vs. fixed income

James Dolan is a Vancouver-based financial writer.


Originally published in Advisor's Edge

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