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:
New CRA tax filing and information reporting
BC land ownership
Corporate Transparency
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.