All About Estates

Beneficial ownership reporting – beware of penalties

Proposed regulation subsection 204.2(1) of the Income Tax Act (ITA) introduces a requirement for all trusts, that are required to file a return of income, to provide additional information[1] for each person who, in the year, is a trustee (or protector[2]), beneficiary or settlor[3]. This additional information includes:

  • name,
  • address,
  • date of birth (in the case of an individual other than a trust), and
  • jurisdiction of residence and taxpayer identification number.

Trustees’ responsibility

The trustees are responsible for gathering the information outlined above which could prove difficult in some circumstances especially where there is an unwillingness by the reportable person to provide this information.

With the onus of reporting imposed on the trustees, there is concern that the trustees could face penalties for non-compliance or omission of information.

Existing penalties

The ITA has penalty provisions to deal with non-filing and filing of false statements or omission of information regarding prescribed forms.

Not filing the prescribed form can result in a penalty of $25 per day to a maximum of $2,500 under subsection 162(7); whereas a form with missing information can result in a $100 penalty per instance under subsection 162(5). If the form is missing substantial information, the Canada Revenue Agency (CRA) may determine the form to be invalid and impose the larger non-filing penalty under subsection 162(7).

New proposed penalty

A new proposed penalty under subsection 163(5), specifically designed for the beneficial ownership reporting, applies where a person knowingly or under circumstances amounting to gross negligence makes or participates in, assents to or acquiesces in, the making of a false statement or omission in a return of income of a trust. This penalty, calculated under proposed subsection 163(6), is equal to the greater of $2,500 and 5% of the fair market value of all the property held by the trust.

This proposed penalty has a potentially high ceiling, which can be cause for concern if the trustees do not exercise a certain standard of care.

Knowingly or gross negligence

For argument’s sake, let’s assume that the trustees are not acting in such a way to be classified as grossly negligent, however, there is still the concern of knowingly omitting required information.

Under paragraph 28.4.2 of the CRA audit manual, the CRA interprets knowingly as follows:

“Knowingly” implies that a person knew or ought to have known. “Knew” implies that a person deliberately or intentionally acted in such a manner, while “ought to have known” does not mean actual knowledge, but means that the person had in effect the means of knowledge.

There is concern that a trustee could be subject to this new penalty if they knowingly omit required information.

Reasonable effort

The Department of Finance did propose a due diligence defense under proposed regulation, subsection 204.2(2), to ensure trustees were not penalized when they could not identify a particular beneficiary with reasonable effort. Trustees need to be aware that this “reasonable effort” due diligence defense is limited to identifying a particular unknown beneficiary. It does not apply to reporting the information for trustees, settlors or known beneficiaries.

Guidance with proposed penalty

This new proposed penalty is similar to the already existing penalty under subsection 163(2), often referred to as the “gross negligence penalty”. There is significant jurisprudence and commentary in relation to the existing penalty under subsection 163(2) to assist trustees and their advisors in understanding how the CRA and the courts will administer this new proposed penalty provision under subsection 163(5). For starters, the onus is on the CRA to support the penalty assessment.

Reasonable standard of care

To minimize penalties, trustees should use reasonable effort to obtain required information for all reportable persons. If there are gaps in the required information for a reportable person, it would be prudent to disclose the information available instead of omitting the reportable person entirely.

Documentation of the trustees’ efforts to gather the necessary information will be very important in case of a penalty assessment under subsection 163(5). All formal or informal correspondence with the reportable persons should be maintained. In contentious situations, the trustees may need to seek legal advice.

Trustees should always keep in mind the need to exercise a reasonable standard of care of a prudent person when complying with the beneficial ownership reporting to minimize the chance of penalty.

 

[1] This additional information is required to be provided with the T3 Trust Income Tax and Information Return.

[2] A protector would be a person that has the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the appointment of income or capital of the trust.

[3] Settlor as defined in subsection 17(15) of the Income Tax Act.

About John Oakey
National Tax Director for Baker Tilly Canada. John has extensive experience with Canadian corporate and personal income taxes with specialization in the areas of corporate reorganizations, estate planning, succession planning and tax compliance. He also has significant experience dealing with GST/HST issues and U.S. citizen cross-border tax reporting issues.

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