Under the current rules, a trust only needs to file an annual tax return but generally does not need to file the return if it does not earn an income or make any distributions in the year. (Notwithstanding that the Canada Revenue Agency has increased its demand for “nil returns” to be filed under certain circumstances). Further, there is currently no requirement for the trust to report the specific identity of all of its beneficiaries.
The recent Federal Budget refers to this current situation as an information gap that can apparently be exploited by taxpayers engaging in aggressive tax avoidance and/or criminal activities of the “white collar” variety.
The Budget proposes that most trusts will be required to report on the identity of all trustees, beneficiaries, and settlors of the trust, as well as the identity of each person who exerts control over trustee decisions, effective 2021. The proposed requirements will apply to most trusts resident in Canada as well as non-resident trusts that are currently required to file a tax return in Canada.
Trusts to which the proposed reporting requirements apply will need to file a return each year regardless of whether there was distribution of income or not. A new beneficial ownership schedule will be added to the return and must also be completed if required. Failure to comply with the new reporting requirements will be met with penalties.
The overall compliance burden for trust reporting will increase shortly. Trusts will be forced to share information not previously shared, which could be awkward for some trusts (non-resident trusts) in particular. Lack of awareness of these new requirements (or unwillingness to provide the information) may lead to significant non-compliance problems.