The Canada Revenue Agency (CRA) will not administer new reporting rules that were to be effective for trusts with year-ends on or after Dec. 31, 2021, according to guidance released today.
The federal government first proposed expanding the annual reporting requirements governing certain trusts in Budget 2018 as part of its broader fight against tax avoidance. Draft legislation to enable the proposals was introduced in 2018, but never passed into law.
Nevertheless, the government stated in both the 2019 and 2021 federal budgets that it intended to proceed with the measures. As a result, tax and estate professionals have been advising clients under the expectation that the new rules would be effective for year-ends on Dec. 31 or later. This includes recommending trustees consider winding up dormant trusts in order to avoid the compliance burden associated with the proposed rules.
In an update released today, the CRA confirmed it will administer trust tax filings under existing rules — the less intensive reporting requirements — until legislation supporting the new rules receives royal assent.
“Based on today’s announcement from CRA, the beneficial ownership information [required under the proposed legislation] does not currently need to be reported to CRA for the 2021 tax year,” said John Oakey, national director of tax services with Baker Tilly Canada in Halifax, in an email to Advisor’s Edge.
Given that legislation to implement the new trust reporting requirements has yet to be enacted, “it is unlikely legislation would now be applied retroactively to the 2021 tax year,” said Susannah Roth, partner with O’Sullivan Estate Lawyers LLP in Toronto, in an email.
Oakey noted that CRA’s update guidance applied only to trust returns filed with the CRA. “Trust returns filed with Revenu Quebéc still must report the beneficial ownership information,” he said.
In Budget 2018, the federal government introduced new rules expanding the annual reporting requirements for most trusts, including trusts that might not have been required to file an annual return under current rules. The proposed rules, which included onerous new penalties for non-compliance, were to be effective for trusts with year-ends after Dec. 30, 2021.
The proposed reporting requirements would apply to certain express trusts resident in Canada and non-resident trusts that must currently file a T3 return. Under current legislation, a trust that has no activity during the year and no income tax payable is not required to file a T3 return.
Exemptions to the proposed new rules still exist for certain specialized trusts or those holding assets worth $50,000 or less.
The proposed reporting legislation would compel trusts to reveal the identity of all trustees, beneficiaries and settlors, as well as the name of any person who can control the trust’s appointment of income or capital. Failure to file the information would result in a fine $25 per day up to a maximum of $2,500. However, the fine could rise to as much as 5% of the trust’s total assets when the failure to file was done knowingly or was a result of gross negligence.
Earlier this week, the CRA released the 2021 T3 Trust Income Tax and Information Return to tax practitioners through professional databases. The updated return, which has not yet been made available on the CRA’s website, does not appear to acknowledge the proposed new trust reporting rules.
In the updated guidance on its website, the CRA indicated that “the proposed beneficial ownership reporting requirements will not be part of the published 2021 T3 income tax return.”
Despite the new guidance, “trustees should still be prepared for the new rules when they are enacted,” Roth said.
Trustees should “ensure they gather the necessary information to avoid being caught without the ability to disclose when the legislation is enacted, should beneficiaries be uncooperative. Where appropriate, trustees should also consider winding up trusts, such as those that no longer serve a purpose,” Roth said. Finally, trustees should seek legal and accounting advice, addressing their circumstances, “to ensure they do not overlook any responsibilities which could have negative consequences for the trust.”
The filing deadline for a trust with a 2021 calendar year-end is March 31.
The Department of Finance did not respond to queries regarding the status of pending legislation by press time. (Update, Jan 17: The Department of Finance said it has no further information to provide at this time.)