As 2020 begins to wind down and mercifully come to an end, we are reminded of new rules coming into force for administrators of trusts beginning January 1, 2021.
As part of its 2018 federal budget, the Government of Canada introduced new tax return filing and information reporting requirements for trusts. Currently, a trust must file a T3 return if it has tax payable on its assets, or income or capital is distributed to beneficiaries.
Going forward, the Canada Revenue Agency (CRA) will begin to collect detailed information on the identity of all trustees, beneficiaries and settlors, as well as any person who has the ability to apply control over trustee decisions about appointment of income or capital. This information includes the name, address, date of birth, jurisdiction of residence, and taxpayer identification number (“TIN”). This information must now be filed with a T3 return.
For some trusts, a T3 return may never have been required before, for others, these new reporting requirements could prove very onerous. Trustees and administrators are encouraged to plan ahead and seek the advice of a tax professional as non-compliance carries significant penalties of around $2,500.00 on top of any existing penalties.
When it comes to estate planning, the new rules will affect most express trusts, and settlors preparing their testamentary documents should also seek the advice of a planning professional. Especially as it is yet unknown how the new rules may affect the use of secret and semi-secret trusts.
Oosterhoff on Trusts (9th ed.) reminds us that with a secret trust, “the Will neither discloses the existence of the trustee, nor the beneficiary,” and under a “semi-secret trust, the Will discloses the existence of the trustee, but not the beneficiary” (p.830).
We are expecting the CRA to issue clarification and guidance in the coming months as the new rules yield a host of as yet unanswered questions, namely: By seeking out personal details from beneficiaries, does a trustee then risk breaching the terms of a trust that was settled on terms meant to stay private? Is there a risk of increased non-reporting through the use of secret trusts? And what happens if the required information is not available, or withheld?
As our managing partner, Suzana Popovic-Montag told the Law Times in February of this year, “There has been a historical lack of transparency in the administration of trusts and estates, and governments are now taking an interest in the use of these tools in the transfer of assets for taxation purposes.” Beyond the questions raised above, Suzana goes on to say that we should “‘expect concern surrounding privacy issues’ any time there are new or enhanced disclosure obligations.”
The federal government is looking to crack down on aggressive tax avoidance, and beginning January 1, 2021, a new era of disclosure will begin. While the full picture is not yet completely clear, we will keep you posted.
Thanks for reading!
Ian Hull and Daniel Enright
 The TIN includes a social insurance number for individuals, a business number for corporations and partnerships, or an 8 digit trust account number issued by CRA to trusts.
As it relates to the administration of an estate:
- the Estate’s T3 tax return is now due on June 1, 2020 instead of April 14, 2020. Tax payments owed by a trust remain deferred until September 1, 2020
- the filing of an individual’s tax return remains uncertain as mentioned in Paul’s blog
Information is changing daily. If the above applies to you, or an estate that you are responsible for, you should contact a professional accountant and/or monitor the CRA website.
Stay safe and wash your hands,
Please click on this link to see our COVID-19 related resources.
Notably, individual returns, normally due on or before April 30, 2020 are now due on or before June 1, 2020. Payments due April 30, 2020 are due on or before September 1, 2020, with no penalty or interest being payable if payments are made on or before September 1, 2020. Installment payments due on a date before September 1, 2020 can be paid up to September 1, 2020.
Things are not so clear with respect to terminal tax returns for deceased taxpayers. Normally, these are due on April 30, 2020 if the deceased died between January 1, 2019 and October 31, 2019, and six months after death if the deceased died between November 1, 2019 and December 31, 2019. What is not entirely clear is whether these deadlines are also extended. Some accountants are advising to file and remit payment in accordance with the old deadlines until further clarification is given. Hopefully, this issue will be clarified shortly.
Please note that things change daily, and further clarification may be coming soon. If these deadlines may apply to you, or an estate that you are responsible for, please consult a knowledgeable accountant and/or monitor the CRA website.
Thank you for reading. Stay safe and healthy.
Last year I blogged about some possible changes to the CRA’s Voluntary Disclosure Program (“VDP”). The new VDP rules came into effect March 1, 2018.
One of the concerns that had been raised in relation to the VDP changes in advance of them coming into effect, is that it seemed the CRA was attempting to make the VDP less accessible for taxpayers. For example, the changes created a “tiered” system for VDP applications, meaning that applications would fall under either the “general program” (for more minor non-compliance) and the “limited program” (for major non-compliance). Another example is the apparent elimination of the “No-Name” method for submitting disclosure (which allows the taxpayer to gain some understanding of how their situation may be treated by CRA in advance of officially submitting his or her application).
According to this article, in July and August 2018, the CRA responded to the first round of disclosure applications that had been filed under the new rules. The CRA’s approach in practice was troubling to the article’s authors.
In particular, the CRA appears to be taking the position that it will be rejecting VDP applications if the relevant tax returns aren’t enclosed. This seems to be contrary to the guidelines set out in CRA’s Information Circular IC00-1R6. While CRA takes the position that it will reject applications that do not enclose tax returns, the Information Circular seems to indicate that a taxpayer may submit additional information or documentation to complete the VDP application up to 90 days from the day that the CRA receives the application. The article’s authors are of the view that the language of the Information Circular in this regard would include the relevant tax returns, as these are clearly documents required to complete the disclosure. The position taken by CRA provided confirmation to the authors that CRA was seeking to make the VDP inaccessible for taxpayers.
As we previously set out in this blog, the VDP can be relevant to an Estate Trustee if the deceased was not in compliance with his or her obligations to the CRA, such as failure to file income tax returns, or reporting of inaccurate information. The VDP may allow an Estate Trustee to voluntarily disclose such non-compliance and avoid penalties. Unfortunately, with the new VDP rules in effect, and the apparent uncertainty regarding how the CRA will apply its guidelines, it may be tricky for Estate Trustees to make effective use of the VDP. It will be interesting to see how the new VDP rules develop, and any further feedback to their practical application.
Thanks for reading,
Other blog posts that may be of interest:
Submissions from the Joint Committee on Taxation Regarding Proposed Changes to Voluntary Disclosure Program
Last month, I blogged about some changes proposed by the CRA to the Voluntary Disclosure Program. It was noted that the CRA would be accepting comments with respect to the proposed changes until August 8, 2017.
The Joint Committee on Taxation of The Canadian Bar Association and Chartered Professional Accountants of Canada (the “Joint Committee”) made submissions in this regard in a letter to the Minister of National Revenue dated August 8, 2017.
In their letter, the Joint Committee recommends that the Minister reconsider a number of points, including, among other things, the introduction of a multi-tier system including the “general program” and the “limited program”. The Joint Committee states that part of the success of the Voluntary Disclosure Program is due to the fact that taxpayers applying to the Program are able, to a certain extent, to predict the consequences of initiating a voluntary disclosure. This allows non-compliant taxpayers to assess the benefits of the Program as opposed to the ongoing uncertainty of non-compliance and the risk of assessment and/or prosecution. The Joint Committee submits that the proposed changes may lead to uncertainty, and therefore, may encourage non-compliance, which would be inconsistent with the objectives of the Voluntary Disclosure Program and with encouraging non-compliant taxpayers to become compliant.
The submissions from the Joint Committee also comment that the draft Information Circular setting out the proposed changes apparently provides that the No-Name method of disclosure, wherein certain information may be provided to a Voluntary Disclosure Program officer without identifying the taxpayer, in order to obtain a better understanding of how the taxpayer’s disclosure may be addressed, will no longer be available for disclosures commencing after December 31, 2017. In the Joint Committee’s experience, non-compliant taxpayers are more likely to proceed with a voluntary disclosure if the process is perceived as transparent and predictable. If they are correct and the Minister of Revenue proposes to eliminate the No-Name disclosure method, the Joint Committee urges the Minister of Revenue to reconsider this proposed change.
The letter from the Joint Committee makes a number of other submissions that are beyond the scope of this blog, but can be read in full here.
Thanks for reading,
Other blog posts that you may enjoy:
We have previously blogged about the CRA’s Voluntary Disclosure Program and how it can, for instance, be useful for estate trustees should they encounter a situation where the deceased whose estate they are administering failed to meet their tax obligations. Essentially, the program gives a taxpayer a second chance to come forward voluntarily and change a tax return that was previously filed, or to file a return that should have been filed, and to request relief from prosecution or penalties as a result of any erroneous or incomplete filings.
However, as discussed in a recent article in the Financial Post, the CRA has proposed some changes to the Voluntary Disclosure Program. The draft “Information Circular – IC00-1R6-Voluntary Disclosures Program” prepared by the CRA for discussion purposes can be found here. The key proposed changes would narrow the eligibility for the Voluntary Disclosure Program, and impose additional conditions on taxpayers who are applying. The proposed changes also include less generous relief in certain circumstances, such as cases of major non-compliance.
As discussed in a PwC Tax Insights publication, another proposed change creates two tracks into which the CRA can assign a taxpayer upon application to the Voluntary Disclosure Program—either the “general program” or the “limited program”. The general program is intended for inadvertent and minor non-compliance, while the limited program is intended for major non-compliance. The general program involves mostly minor changes, including a limitation on interest relief. Major non-compliance, which will fall into the limited program, includes, for example, active efforts to avoid detection, multiple years of non-compliance, a sophisticated taxpayer, or disclosure being made after an official CRA statement regarding its intended focus of compliance or following CRA correspondence or campaigns. If an application is assigned to the limited program, the relief available to the taxpayer will no longer include interest relief or relief from penalties other than gross negligence penalties. The determination of which track an application will be assigned to will be made on a case-by-case basis.
Previously, there were four conditions that had to be met in order to be considered as a valid disclosure. The proposal would add a fifth condition, requiring payment of the estimated tax owing along with the application. The changes described above are only a few of the proposed changes, and all such changes can be found in the Information Circular.
The CRA will be accepting comments with respect to the changes proposed in the draft Information Circular – IC00-1R6 – Voluntary Disclosures Program until August 8, 2017. Any changes to the program would come into effect as of January 1, 2018.
Thanks for reading,
Other blog posts that may be of interest:
As you may have heard, new rules have recently come into effect that may not only have a stabilizing effect on the housing market in Canada but also usher in new Canada Revenue Agency (“CRA”) reporting requirements.
Until recently, when an individual sold their home, they did not have to report the sale on their income tax return to take advantage of the principal residence exemption. However, on October 3, 2016, the Canadian government announced that, starting with the 2016 taxation year, the sale of a primary residence must be reported to the CRA to receive the benefit of the principal residence exemption. This new reporting requirement will apply to any sale that took place on or after January 1, 2016.
The principal residence exemption is a benefit that provides a vendor with an exemption from capital gains earned on the sale of a property that has been used as their primary residence. The exemption will apply for each year the property was designated as their primary residence.
With the new reporting requirement in place, to benefit from the principal residence exemption, the CRA will only allow the principal residence exemption if the sale and designation is reported. Accordingly, estate trustees and tax professionals should pay careful attention during the preparation of income and terminal tax returns to ensure compliance with this reporting obligation.
You may also be interested in reading:
Thanks for reading!
I recently came across an interesting New York Estate Planning Blog, which attempts to address the valuation of intangible property in relation to the payment of estate administration tax.
Although it is rather straightforward that estate trustees are required to value assets of a deceased person, and pay taxes on those assets, the issue posed by the blog is, whether intangible assets are included in the payment of estate administration taxes, and if so, how a valuation is reached.
In Ontario, intangible property is deemed to be owned by the deceased at the time of death, and is therefore included in the calculation of estate administration tax. This has been made clear by the Ministry of Finance.
Valuing intangible property appears to be less clear though. Apparently, in the USA, disputes have arisen between estate trustees and the Internal Revenue Service (IRS), over the valuation of intangible assets, and to the amount of estate administration tax paid.
This dispute seems to be highlighted by the valuation of publicity rights. For example, the estate trustees of Michael Jackson’s estate have valued his estate at $2,105.00, whereas the IRS has attributed a value of $1.125 billion – therefore alleging that an additional $702 million is owned in estate administration tax (based on taxes and penalties). According to the LA Times, most of the dispute is over the price attributable to the King of Pop’s image, and his interest in a Trust which includes the ownership of Beatles songs, including Yesterday, Get Back, and Sgt. Pepper’s Lonely Hearts Club Band.
While most Ontario residents will not be burdened with valuing publicity rights, it is nonetheless important to consider the inclusion of assets, including intangible assets, in calculating estate administration tax, and that a proper valuation is obtained. Otherwise, in reviewing the payment of estate administration tax paid, the CRA may not ‘Let it Be’.
The “death” of Alyanna Lapuz was recently “fixed” by the Canada Revenue Agency after Ms. Lapuz received a letter addressed to the “Estate of the Late Alyanna Lapuz”, dated January 7, 2016. Ms. Lapuz was shocked by the letter because she was 21 years old and eagerly awaiting the start of a dental hygienist program in April.
According to Ms. Lapuz, she believes that the error may have occurred when she called the CRA to arrange for a direct deposit of her GST refund. Ms. Lapuz then became quite concerned that the error would affect her student loan application because her social insurance number was rendered invalid as the result of being clerically deceased.
Click here for the CBC’s coverage of Ms. Lapuz’s story.
Ms. Lapuz’s story is also not unique. A similar incident was previously covered by our blog here.
According to the CBC, 5,489 Canadians were erroneously entered as deceased in the CRA’s system between 2007 and 2013. In a statement to the CBC, CRA advised that the rate of such errors has decreased since 2013.
For those of you who are interested, click here for the Ombudsman Special Report on this very issue.
Thanks for reading!
When gifts are made by an individual’s estate, can the individual’s surviving spouse share the donation credits arising from that gift?
On January 27, 2015, the Canada Revenue Agency (“CRA”) made comment on this issue with regards to the current rules, as well as the rules that will apply starting in 2016. The CRA confirmed that its practice of allowing spouses and common law partners to share donation credits will indeed continue into 2016 and beyond. This practice was also codified in the 2014 Federal Budget.
The 2014 Federal Budget did introduce substantial changes to the tax treatment of gifts under a Will or beneficiary designation. Current CRA rules deem charitable gifts made on death as having been made by the deceased immediately before death, resulting in a tax credit to the donor’s final tax return. In cases where there is an excess credit, it can be carried back and used against the income reported in the prior year.
The new rules also propose that gifts made within 3 years of an individual’s death can be allocated to the available tax credits against the tax year of the estate in either: the year the gift was made, an earlier tax year of the estate or the last two tax years of the deceased prior to death.
Executors will be tasked with making the best decision in the circumstances but will likely welcome the increased flexibility. The CRA has further clarified that the changes do not allow a surviving spouse to claim gifts made by the deceased within 3 years of their death.
It is important to remember that only donations to registered charities qualify for tax credits and that the tax consequences of a gift depend on a list of factors. More information on which charities are registered and the tax consequences of certain gifts can be found here and here, respectively. As with any estate planning, a qualified professional should be consulted before making any changes.
Thank you for reading.