Often, for tax planning or other purposes, family trusts are created, for example, to own shares of private corporations. Trusts have also been created to hold personal use property that does not generate income either for estate planning or creditor proofing reasons.
Until this year, these and other similar trusts were not required to file an annual trust tax return unless they either had taxes payable in the year, distributed income or capital to beneficiaries, or the tax department specifically requested a return. Unless the corporation owned by the trust, say, paid a dividend in the year, there was likely no income or activity and no obligation to incur the cost of filing a return.
As of 2021, all trusts, with a few exceptions noted below, will be required to report the identity of all trustees, beneficiaries, and settlors of the trust, as well as any person with the ability to exert control or override trustee decisions over distribution of income or capital of the trust. The information required to be disclosed will include their names, addresses, date of birth, tax residency and identification numbers (social insurance or business numbers for corporations). This report, which has yet to be published by CRA, will form part of the trust’s annual tax return and cannot be filed separately from the return.
Accordingly, many trusts which, to date, have not had an obligation to file a return, will now be required to do so (commencing with the 2021 year) due within 90 days of the trust’s year-end. All trusts other than graduated rate estates must have a fiscal year ending on December 31.
In addition, trusts that have already been filing trust tax returns will now be required to disclose much more information than in the past. Most discretionary family trusts are created with a considerable amount of beneficiaries to provide the trustees with flexibility in allocating future income or gains. Some beneficiaries may not have been alive or existed when the trust was created such as unborn children or corporations controlled by beneficiaries. All trustees and advisors will need to revisit the original trust deeds to ensure all beneficiaries will be considered, regardless of whether any income distributions occurred in the current or prior fiscal years.
Trusts not required to comply with the new reporting requirement include:
- mutual fund trusts
- trusts governed by registered plans such as RRSPs, RRIFs, RESPs and TFSAs
- lawyer’s trust accounts
- graduated rate estates
- trusts that have been in existence for less than three months
Failure to file a return or failure to provide the additional information will result in penalties ranging from $100 to $2,500. If the failure to file is deemed to have been made knowingly, or due to gross negligence, there will be an additional penalty equal to the greater of $2,500 and 5% of the maximum value of the property, held by the trust during the year.
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Have questions regarding your particular family trust situation or any other tax planning issues? Please do not hesitate to contact one of our Estates and Trust specialists.