Trustees are Subject to Enhanced Duty to Report to Beneficiaries under Alberta's New Trustee Act

PRACTICAL WISDOM from Phronesis Law LLP

Alberta’s new Trustee Act came into force on February 1, 2023, with the goal of making it more efficient to create and manage trusts while reducing the need to go to court.  The revised Trustee Act is based on the Uniform Law Conference of Canada’s Uniform Trustee Act and the changes are not unique to Alberta.   Trustees, potential settlors (person who establishes a trust), and their advisors are all encouraged to consider the impact of these changes. 

This article discusses the statutory Duty to Report contained in section 29 of the Trustee Act.

The Duty to Report applies to many trusts, including discretionary family trusts and trusts created in Wills, but does not apply to trusts that arise by operation of law (such as implied, constructive, or resulting trusts) or estates (covered under other legislation). 

Statutory Duty to Report 

Trustees already have a common law duty to provide a beneficiary with accounts and certain trust information, upon request. However, the Duty to Report requires trustees to provide written reports to the qualified beneficiaries[1] within 2 months after the end of the fiscal period of the trust[2]. Such reports must include detailed information about the trust including a statement of the trust’s assets and liabilities at the beginning and end of the fiscal period and the value of those assets and liabilities, the basis for the asset valuations, a statement of receipts and their sources, and a statement of disbursements and their receipts. The trustees must allow the beneficiary to inspect the source documents on written request.  

The Duty to Report aims to increase transparency and accountability in the administration of trusts and is a welcome addition to the Trustee Act, as it provides greater protection to beneficiaries vulnerable to abuse or mismanagement of trust property. 

The Trustee Act recognizes that the trustees should not be required to provide this level of disclosure in all situations. As such, a trustee is not required to disclose the information if to do so, in the trustee's opinion, would be unreasonable or would conflict with other legal duties the trustee may have. In making such determinations, trustees should carefully examine any other legal obligations they may have, including as the legal owners of shares that may be subject to a Unanimous Shareholders Agreement and confidentiality/non-disclosure agreements. Further, trustees should ensure their decisions are adequately reasoned and documented.

Waiver of Duty to Report 

The Trustee Act also permits beneficiaries to relieve a trustee of the Duty to Report. While this may seem counterintuitive, there are situations where it may be appropriate for beneficiaries to waive the Duty to Report.  

For example, if beneficiaries are sophisticated investors or have a close relationship with the trustees, they may feel that regular reports are unnecessary or may wish to limit the type of disclosure or the frequency of reporting. In these situations, beneficiaries may agree to waive the Duty to Report to reduce the administrative burden on the trustees and the financial burden of obtaining annual valuations of the trust property.

However, it is important to note that the waiver must be voluntary and informed, meaning that the beneficiaries must understand the implications of waiving the Duty to Report and agree to it freely. Further, the waiver is revocable with written notice to the trustees.  

Exclusion of Duty to Report 

In addition to waiving or limiting the Duty to Report with the agreement of the beneficiaries, it is also possible for the trust deed itself to waive or modify the Duty to Report. With certain exceptions, the trust deed will prevail over contrary provisions in the Trustee Act.

To waive the Duty to Report for a newly created trust, the settlor should expressly state that the statutory Duty to Report does not apply to the trustees. This can be done in the trust deed itself or a separate document, such as a letter of wishes. Depending on the terms of the trust deed, it may also be possible to amend an existing trust deed to waive the Duty to Report.

While the Duty to Report can be waived or modified in the trust deed, the settlor should consider this carefully and with the advice of a legal professional. Excluding the Duty to Report may not be in the best interests of the beneficiaries and may even expose the trustees to potential liability if they are later found to have acted improperly.

If the Duty to Report is waived or modified in the trust deed, the beneficiaries should be provided with other mechanisms to ensure they receive sufficient information about the trust.

Concluding Thoughts 

 The Duty to Report is part of the movement towards greater transparency and accountability in the administration of trusts. By requiring trustees to provide regular reports to beneficiaries, the new Trustee Acthelps ensure that trustees act in the best interests of the beneficiaries.

Please reach out to us if you have any questions about the Duty to Report, or the new income tax reporting and disclosure rules for trusts that we have discussed in prior articles. 

[1] Qualified beneficiaries include beneficiaries with a vested interest as well as any beneficiary who has delivered written notice to the trustees that they want to be a qualified beneficiary. 

[2] We note that this reporting deadline will generally fall before the trust returns have been completed.     

Time to Review Your Family Trust

Family trusts often play a key role in estate planning for family business owners, allowing owners to freeze the size of their estate while providing flexibility to adapt to changing tax laws and evolving family and business circumstances.  

Recent changes in legislation have affected how family trusts can be used and the information that must be disclosed. If you have a family trust, here are four things that you should consider:  

1. New CRA tax filing and information reporting

2. BC land ownership

3. Corporate Transparency

4. Compliance/Audit Risk

New CRA Tax Filing and Information Reporting

Family trusts are subject to new filing and information reporting requirements that are effective for taxation years ending on or after December 30, 2021. 

Tax Return Filing: Subject only to a few narrow exceptions, all family trusts must now file a T3 Return.  The previous CRA administrative position that exempted trusts from filing where there was no income or activity will not apply to taxation years that end on or after December 31. 

Information Reporting: In the past, the CRA obtained limited information from the trust deed provided when applying for a trust account number.  The updated T3 Return now requires personal information about the trustees, beneficiaries, settlors and persons able to exert influence over trustee decisions about distributions of income or capital.  Consequently, the CRA will receive the name, address, date of birth, jurisdiction of residence and taxpayer identification number (e.g., social insurance number) for all of the persons listed above.   

Penalties for Non-Compliance: If a family trust fails to file a T3 return with the required information, the penalty is $25 per day with a minimum penalty of $100 and a maximum penalty of $2,500.   The maximum penalty increases to 5% of the fair market value of the trust property where a person knowingly or due to gross negligence: (a) makes a false statement or omission in the T3 Return or (b) fails to file the T3 Return. 

Trustees should take proactive steps to meet these additional disclosure requirements. There are a few reasons that it may require significant time and effort for trustees to obtain the personal information needed to complete the T3 Return:  

• Trust deeds are frequently drafted to provide maximum flexibility and may provide for a wide range of beneficiaries or classes of beneficiaries that the trustee must identify;

• A settlor includes persons who made direct or indirect loans or transfers to the trust, meaning the history of the trust needs to be examined; and

• The ability to influence can come from either the terms of the trust or a related agreement such that identifying a person that can influence trustee decisions may take some additional due diligence.

BC Land Ownership

Family trusts that have an interest in real estate in British Columbia must file a transparency report by November 30, 2021. 

This requirement is found in the recent BC Land Owner Transparency Act (LOTA) that requires disclosure of the beneficial owners of real estate (and holders of long-term leases) in the publicly accessible Land Owner Transparency Registry (LOTR).

Similarly, family trusts that acquire an interest in BC real estate must file a transparency report when they apply to register their interest and if there is a subsequent change in the beneficiaries of the family trust. 

The transparency report requires identification information for each trustee, beneficial owner and settlor of the family trust – including date of birth, address, residency, social insurance number and more.  For some family trusts, it may be difficult to ascertain which persons are beneficial owners and settlors for the purposes of the LOTA.  Failure to comply (which includes failure of reporting bodies to take reasonable steps to confirm the accuracy of the information and failure of interest holders to provide the information) can result in significant fines.   

Where disclosure could threaten a vulnerable beneficiary's safety or mental or physical health, trustees should consider applying under LOTA to withhold some or all that beneficiary's identification information from the public search results. 

Family trusts that purchase BC real estate are also subject to new disclosure requirements on the Property Transfer Tax Return Form, which require the settlors and beneficiaries of bare trusts and the beneficiaries of other relevant trusts to be listed.  

Corporate Transparency

The shift in Canada towards greater corporate transparency could erode at least some of the confidentiality presently afforded to beneficiaries of family trusts that own shares in private corporations.

Federally incorporated private corporations must create and maintain a register of certain information about individuals with significant control and there are similar requirements in effect, or proposed, for private corporations incorporated in the provinces and territories.  Trustees of family trusts that hold interests in corporations should be preparing to disclose the required information to these corporations. 

Public consultation and discussions are ongoing in some jurisdictions regarding a publicly accessible registry. In the meantime, corporations must make these registers available to authorized persons (directors, shareholders and creditors) and certain investigative bodies, including the Canada Revenue Agency (CRA).

If there is a need to maintain privacy, trustees may wish to seek advice about whether the trust deed provides flexibility to narrow the possible beneficiaries or ensure that certain persons are not considered beneficiaries of specific assets.  

Compliance/Audit Risk

The CRA will undoubtedly use all of the additional information now at its disposal for audit purposes. 

A few of the areas where this additional information may be helpful to the CRA include: challenges to the residency of the trust (especially where the settlor and beneficiary reside in a different jurisdiction than the trustees), identifying corporations that are associated with other corporations owned by family trust beneficiaries, reviewing planning around the 21-year deemed disposition rule and compliance with the relatively recent "tax on split income" (TOSI) rules described below. 

TOSI rules have had a significant impact on tax planning that used family trusts to divert dividend income to lower-income family members.   Since 2018, avoiding the TOSI rules when paying dividend income to spouses and adult children through a family trust requires a certain level of involvement in the business by the recipients. Trustees of family trusts should review tax laws with professional advisors on a regular basis.

Proper trust administration, monitoring of changing tax laws, and planning well in advance of the 21-year deemed asset disposition are all ways that trustees can minimize the chances of an unfavourable tax audit.

Future of Family Trusts

Despite the recent changes, the benefits of family trusts to tax and estate planning have not been extinguished and may include expanding access to available capital gains deductions, moving redundant cash from operating businesses to holding companies and separating legal ownership and control of the property from beneficial ownership.  In many cases, family trusts will remain a valuable part of a practical tax and estate plan. 

The lawyers at Phronesis are well qualified to assist with reviewing trust deeds, advising on the disclosure and reporting requirements and making necessary amendments to trust documents.  

CEWS – Income Inclusions & Audits

January 25, 2021 marked the one-year anniversary of the first confirmed COVID-19 case in Canada and March 15, 2021 will mark the one-year anniversary of the start of the first Canada Emergency Wage Subsidy (“CEWS)” qualifying period. The government of Canada introduced CEWS as part of its COVID-19 Economic Response Plan in an attempt to prevent further job losses stemming from the pandemic. CEWS was implemented through amendments to the Income Tax Act (Canada) (the “ITA”) which essentially deem the CEWS amount for each qualifying period to be an overpayment of the qualified employer’s tax liability under Part I of the ITA resulting in a “refund” to the qualified employer for each qualifying period. 

At the core of the CEWS program was the federal government’s desire to encourage employers, who had encountered decreased revenues as a result of COVID-19, to retain or re-hire their employees during the pandemic. Most practitioners are now abundantly familiar with the mechanics of CEWS so, instead of repeating what most advisors already know and what is already available in numerous resources, this article highlights a few of the more recent CEWS topics that advisors are now dealing with.

Income Inclusion

Subsection 125.7(3) of the ITA requires CEWS to be included in income “immediately before the end of the qualifying period to which it relates”. Consequently, it is not when the subsidy is received that matters but the end date of the qualifying period to which the subsidy relates. 

Advisors should be alert to situations where employers are delayed in applying for CEWS. Where an employer filed its tax return before applying for CEWS with respect to a qualifying period that fell within the employer’s taxation year, the CRA has advised that the employer will need to amend the employer’s income tax return to include the amount of CEWS received for a qualifying period that falls within their filed tax return.

Another potential hiccup to watch for when reporting CEWS is the difference between accounting and taxable income stemming from the misalignment of the qualifying periods and calendar months. 

Audits

Given the amount of money that the federal government has paid out under the CEWS program, it is no surprise that the CRA is now extending considerable resources to ensure that those who have received CEWS were entitled to it. The CRA has been honing their audit review process over the past few months and has commenced post-payment audits of taxpayers who have received CEWS. 

An extensive template audit letter started making the rounds in the media and amongst practitioners in the Fall of 2020. It only took a quick scan of the letter to raise immediate concerns about a large amount of information and supporting documentation being requested by the CRA on an expedited basis. However, some relief was provided in the CRA’s comments in the October 26, 2020 CPA Canada – CRA Webinar on CEWS and more wherein the CRA representative stated that the letter making circulation was only a template with a list of documents that could be required but not that would be required in every information request. It was also noted that the issue has been addressed with auditors and that the level of the information request will be dependent on the type of claimant and the complexity of the CEWS claim. If you, or one of your clients, receive the nine-page exhaustive template, consider calling the assigned auditor or team leader to gain further clarity as to what information and supporting documents are being requested. 

So, what can we expect to see from the CRA’s dedicated CEWS audit program? Phase one will examine qualifying periods one through six, cover all regions of Canada and will review all categories of taxpayers including corporations, individuals, partnerships and charities. There will be a random element to the selection process as well as the use of algorithms to identify claimants that may be at a high risk of non-compliance. Areas of interest for the CRA will include employer eligibility, eligible remuneration, confirming the qualifying revenue drop and ensuring that eligible employees are employees and not contractors. It is expected that this dedicated audit program will cease in 2022 or 2023 and that CEWS audits will then be part of the normal tax audit program.

Recommendation: advisors should encourage clients to prepare for an audit by having the appropriate corporate records and documents assembled and ready to go. In preparation for these audits, advisors may also find themselves in the position of needing to have difficult conversations with clients around ineligibility and the anti-avoidance rule. Potential consequences of an audit that finds errors or ineligibility include, but are not limited to, repayment of all or a portion of the subsidy with interest and penalties (both monetary and criminal for false statements) and director liability.