Feds release draft legislation on trust reporting, ETF taxation

The Department of Finance released long-awaited draft legislation Friday concerning proposed changes to trust reporting rules and to the taxation of ETFs.

The draft legislation also implements several tax proposals that were announced in the 2021 budget but not included in last year’s budget bill.

Under the draft legislation, expanded rules for reporting the beneficial ownership of certain trusts would apply to trusts with taxation years ending on Dec. 31, 2022 and after. The proposed reporting legislation compels trusts to reveal the identity of all trustees, beneficiaries and settlors, as well as the name of any person who can control the trust’s appointment of income or capital.

The federal government first proposed expanding the annual reporting requirements in Budget 2018 as part of its broader fight against tax avoidance. The proposals were to be effective for trusts with year-ends on or after Dec. 31, 2021, but draft legislation to enable the proposals, introduced in 2018, never passed into law.

In January, the Canada Revenue Agency confirmed it would administer trust tax filings under existing rules — the less intensive reporting requirements — until legislation supporting the new rules receives royal assent.

With the change in effective date, “we now have clear guidance from Finance that the rules do not apply [retroactively] for the 2021 taxation year,” said John Oakey, national director of tax services with Baker Tilly Canada in Halifax, in an email to Advisor’s Edge.

Oakey suggested that tax practitioners and their clients use the extension to gather the required reporting information well in advance of the filing deadline, which is March 31, 2023 for a trust with a tax year ended Dec. 31, 2022. Penalties for late filing could be up to $2,500 — or 5% of a trust’s assets when the failure to file is done knowingly or as a result of gross negligence.

“Don’t wait until the last minute,” Oakey said.

Friday’s draft legislation governing trust reporting contained a few other notable differences from the 2018 version: there’s an exception to trust reporting for trusts where all the units of which are listed on a designated stock exchange; there is no requirement to disclose information for trusts subject to solicitor-client privilege; and bare trusts and arrangements are now considered trusts for the purposes of the proposed reporting rules.

The 2022 draft legislation also includes an update to the “allocation to redeemers” methodology for ETFs. That methodology affects how allocations of capital gains are treated when ETF unitholders make redemptions.

The government first proposed changing the methodology in the 2019 federal budget due to concerns that the methodology provided an “inappropriate” tax deferral benefit opportunity for certain fund owners.

However, the fund industry raised concerns that the proposed changes would make the capital gains refund mechanism the only reasonable option for ETFs to allocate gains to redeeming unitholders — a methodology that can result in double taxation.

The 2022 draft legislation contains a new formula specific to ETFs that will apply to tax years beginning after Dec. 15, 2021.

The financial industry has been awaiting additional guidance from the Department of Finance since it received a reprieve last June, when the 2021 budget implementation act received royal assent. Provisions in the 2021 budget act had included an exception for tax years beginning before Dec. 16 for ETFs.

Finally, the 2022 draft legislation also seeks to implement proposals from the 2021 budget. These include expanding eligibility for the disability tax credit; including post-doctoral fellowship income in “earned income” for RRSP purposes; improving electronic filing for key tax forms; and expanding the CRA’s audit powers.

Public submissions on reporting requirements for trusts and the allocation to redeemers rules should be received by April 5, while submissions on most other measures should be received by March 7.

Friday’s draft legislation did not include proposed changes to the annual disbursement quota governing charities and to the tax on luxury vehicles. Both proposals were included in Budget 2021 and were set to be effective in 2022. The government held consultations last year on both proposals, and the fall economic update noted that draft legislation and details on when the tax would come into force would be released in 2022.

The government introduced draft legislation in December to impose an annual 1% tax on the value of non-resident, non-Canadian-owned residential real estate that is considered to be vacant or underused. The tax was first proposed in Budget 2021.