The new rules are expected to help crack down on aggressive tax avoidance, tax evasion and money laundering
Private trust funds are expected to become significantly less effective at obscuring tax liability as a result of sweeping federal changes that will come into force in 2021.
The new rules, included in a 78-page supplementary information booklet on tax measures that complemented the 2018 budget, will require those contributing to trust funds as well as the lawyers and professionals managing them to identify themselves in tax filings, reported the Toronto Star.
“As soon as you have more information available about trusts, you remove anonymity and put names to assets,” Mora Johnson, an anti-corruption lawyer and former Global Affairs Canada official, told the Star. “This opens up opportunities for law enforcement to identify who is evading taxes.”
As noted in 2016 by the Financial Action Task Force, an international body that assesses countries’ risk factors for money laundering and terrorist financing, Canada had no general requirement for trusts to be registered. This has left the Canadian government with no comprehensive list of trust funds that have been set up in Canada or are used by Canadians.
“We are addressing significant gaps that currently exist with respect to the gathering of information,” said Finance Ministry spokesperson Dan Lauzon. “We are ensuring that authorities have access to sufficient information in order to determine taxpayers’ tax liabilities, and effectively counter aggressive tax avoidance, tax evasion, money laundering and other criminal activities.”
A source from the ministry confirmed that the reforms gained significant support from the public reaction to media coverage of the Paradise and Panama Papers in recent years.
Under the old rules, trust funds had to file tax returns with the Canada Revenue Agency (CRA) only when they have income from a Canadian source or distributions to a Canadian taxpayer. They also had to submit contact information, which could be for a lawyer or accountant hired to sign forms rather than the trusts’ true owners.
But with the new rules, trusts will be required to file tax returns every year, whether or not they have income or distributions. In addition, they must disclose the identities of all trustees, beneficiaries, settlers and persons with the ability “to exert control over trustee decisions regarding the appointment of income or capital of the trust,” as per the federal budget document.
According to Edmonton tax lawyers MaryAnne Loney and Mike Harris, trusts previously enabled multiple people to claim the same business deduction from the CRA as the agency wasn’t privy to their companies’ association through a trust.
“All this will change once the first trust returns are filed for 2021,” they wrote in a blog post. “It’s far too easy to imagine them putting together an algorithm to identify where associated corporations have not been properly identified in corporate tax returns — not just for 2021 but for previous years as well. And … as soon as any of the parties are non-resident there are a whole slew of other potential issues.”