Ottawa Implementing New Reporting Rules For Trust Funds
The federal government has introduced sweeping new reporting rules for private trust funds, which have been accused of hiding wealthy Canadians’ money from tax collectors.
Going forward, trusts that fail to file a tax return will face fines equalling 5% of its total value. The Canadian government still has no comprehensive list of trust funds that have been set up in Canada or are used by Canadians because there is no requirement to register them. Trusts only have to reveal that they exist when they voluntarily file a tax return to the Canada Revenue Agency. The old system relied on trust funds to self-report.
While trust funds have been used by wealthy families for decades to manage their inheritances, offshore trusts based in tax havens such as the Cayman Islands and the British Virgin Islands are also used by the wealthy to move their riches beyond the reach of Canadian tax authorities.
Last year, it was revealed in the Paradise Papers that the chief fundraiser of the Liberal Party, Stephen Bronfman, and former Liberal Senator Leo Kolber, were linked through two Cayman Islands-based trust funds that had US$60 million (U.S.) in assets outside the reach of the CRA.
In 2016, the Financial Action Task Force, an international body that evaluates country’s risk factors for money laundering and terrorist financing, issued a report criticizing Canada’s trust rules. The new rules will require all trusts to increase how often they must report to the CRA and what information they must include in those reports.
Under the old rules, trust funds had to file tax returns with the CRA only when they have income from a Canadian source or distributions to a Canadian taxpayer. The new rules require trusts to file each year, regardless of whether they have income or distributions.
Under the old rules, trust funds only had to report contact information, which could be a lawyer or an accountant hired to sign forms instead of the true owners of the trust. The new rules oblige trusts to report the identities of all trustees and beneficiaries. The new rules come into force in 2021.