Tax expert explains the new rules on the horizon with regards to trust returns
The Canada Revenue Agency wants to fill in the gaps when it comes to information on clients’ trusts.
Currently, a trust is under no obligation to file an annual tax return if there is no taxable income or no capital distribution to beneficiaries.
In many instances, therefore, trusts have not filed a return for many years, leaving the CRA with a patchwork of information.
Jonathan Braun, manager, tax and estate planning at Investors Group, said that in theory, if no income is being distributed, the CRA would never know the beneficiaries unless they were listed on the original trust document. Many, he said, simply say “future children” but if a child is born, the agency would not know.
That is to change. Starting from tax year 2021, the CRA is making it a requirement for trusts to file an annual reporting requirement listing all the relevant people: the trustee(s), the settler and beneficiaries.
Braun said: “This is relevant because there are a lot of trusts that don’t have income earned every year. Let’s say they own shares in a family operating company and they just own the common shares and the company is growing in value.
“But if dividends are not declared in the trust, and the dividends aren’t flowed out to the beneficiary, there is no reason for that trust to file a tax return. So there can be often be instances where the trust has not filed a tax return for years and years, so this requirement will change things for that trustee.
“So even though there is nothing to report on the trust return they are going to have to file a T3 return.”
The other detail the CRA wants to add to its records when this rule comes into effect is to know who can exert control over the trustee’s decisions.
Braun said: “Typically the trustee makes all the decisions, but in some cases there is another party that can influence a trustee a little bit – where someone has been named as a protector. They don’t get to make any decisions but they are like a watchdog. They can request information from trustee and they can give the trustee a heads up; you really want to do that or you should consider this, for example.”