20 June 2023 STEP Roundtable Q. 4, 2023-0968111C6 - Trust Reporting – Definition of Beneficiary

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does subsection 204.2(1) of the Income Tax Regulations apply to a contingent beneficiary?

Position: The definition of beneficiary for the purposes of section 204.2 of the Regulations is based on its ordinary meaning. A beneficiary, in the ordinary sense, would include a beneficiary whose interest is contingent. However, such a determination is ultimately a question of fact and law.

Reasons: Question of the relevant facts and law.

2023 STEP CRA Roundtable – June 20, 2023
QUESTION 4. Trust Reporting – Definition of Beneficiary

Pursuant to paragraph 204.2(1)(a) of the Income Tax Regulations (the “Regulations”), a trustee of a trust (unless the trust is subject to one of the exceptions in subsection 150(1.2) of the Income Tax Act (the “Act”) (footnote 1) ) is to report information about each beneficiary of the trust, subject to subsection 204.2(2) of the Regulations.

The term “beneficiary” has not been defined for purposes of section 204.2 of the Regulations.

Many family trusts include a “disaster clause” to provide for the situation where all of the primary beneficiaries of the trust have died or ceased to exist. For example, a family trust may include as primary beneficiaries the parents and all of the issue of a particular family, but in the event none of those persons are alive, the trust may provide that the assets of the trust are to go to extended family members (“contingent beneficiaries”). In most situations, it is considered very unlikely that the “disaster clause” will apply, especially where there are many primary beneficiaries. As a result, the trustees of the trust may not even know the identity of the contingent beneficiaries, or it may be considered an imprudent exercise of the trustees’ fiduciary duty to advise these contingent beneficiaries of their contingent interests in the trust.

A) Can the CRA confirm that the trustees are obligated to identify these contingent beneficiaries and provide the information needed to comply with subsection 204.2(1) of the Regulations?

B) If the trustees know the identity of the contingent beneficiaries, are they obligated to inform the contingent beneficiaries of their interests in the trust so as to collect the required information to comply with subsection 204.2(1) of the Regulations?

CRA Response

We have assumed that the questions raised are in respect of trusts other than those that are described in paragraphs (b) and (c) of subsection 204.2(2) of the Regulations.

PART A

For taxation years ending on or after December 31, 2023, generally, where a trust is required to file a return of income pursuant to subsection 150(1) for a taxation year, subsection 204.2(1) of the Regulations requires that additional information is required to be filed in respect of the trust, unless the trust meets one of the exceptions described in paragraphs 150(1.2)(a) to (o). The information required to be filed generally includes the name, address, date of birth (in the case of an individual other than a trust), jurisdiction of residence and taxpayer identification number for each person who, in the year, is a trustee, beneficiary or settlor (as defined in subsection 17(15)) of the trust, or has the ability (through the terms of the trust or related agreement) to exert influence over the decisions regarding the appointment of income or capital of the trust.

The term “beneficiary” has not been defined for purposes of section 204.2 of the Regulations. It is our view that the definition of beneficiary for the purposes of section 204.2 of the Regulations will be based on its ordinary meaning. The determination of whether a person is a beneficiary of a trust, in the ordinary sense, is ultimately a question of the relevant facts and circumstances (in particular, the terms of the trust agreement) and the relevant trust law. Generally, the CRA is of the view that the determination of who is a beneficiary of a particular trust requires a finding of fact based on all the relevant information, including the terms of the trust and the settlor’s intent in establishing the trust. In essence, a beneficiary of a trust is a person (other than a protector) who has a right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person’s right to any of the income or capital is immediate, future, contingent, absolute or conditional on the exercise of discretion by any person.

In our view, a beneficiary, in the ordinary sense, would include a beneficiary whose interest is contingent. However, such a determination is ultimately dependant on the specific facts, terms of the trust as well as the relevant trust law.

That being said, subsection 204.2(2) of the Regulations generally provides that the requirement in paragraph 204.2(1)(a) of the Regulations to provide required information in respect of beneficiaries of a trust in a return is met if the required information is provided in respect of each beneficiary of the trust whose identity is known or ascertainable with reasonable effort by the person making the return at the time of filing the return. If a beneficiary’s identity is not known or ascertainable with reasonable effort, then the person making the return is required to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust.

For example, Department of Finance explanatory notes explain that the beneficiary of a trust may not be known where the trust provides for a class of beneficiaries that includes the settlor’s current children and grandchildren and any children or grandchildren that the settlor may have in the future. In these circumstances the reporting requirement will be met if the relevant information in respect of all of the settlor’s current children and grandchildren are included as well as the details of the terms of the trust that extend the class of beneficiaries to any of the settlor's future children or grandchildren.

Overall, where the identity of each beneficiary, in the ordinary sense, of a trust is known or ascertainable with reasonable effort, the information listed in subsection 204.2(1) of the Regulations is required to be provided. Even if such efforts are unable to identify each beneficiary, it is still necessary to provide sufficiently detailed information to determine with certainty whether any particular person is a beneficiary of the trust. In the circumstances outlined herein, the only exception to providing the required information would be in respect of a trust that is described in any of paragraphs 150(1.2)(a) to (o).

Also, note that pursuant to subsection 150(1.4), for greater certainty, subsections (1.1) to (1.3) do not require the disclosure of information that is subject to solicitor-client privilege.

PART B

The rules in section 204.2 of the Regulations do not address whether a trustee is obligated to inform a particular beneficiary of their interest in a particular trust in order to collect the information required, nor do they prescribe how the information is to be obtained. That being said, paragraph 237(2)(a) provides that, for purposes of the Act and Regulations, any person making an information return must make a reasonable effort to obtain the business number, Social Insurance Number or trust account number of another person or partnership from the person or partnership where it is required for the information return.

Overall, the Act does not dictate the manner in which the required information is to be obtained in respect of a beneficiary; however, it does require reasonable efforts be made in order to obtain the business number, Social Insurance Number or trust account number from the beneficiary. As described above, the requirement in paragraph 204.2(1)(a) of the Regulations to provide the specified information in respect of a particular beneficiary of a trust in a return of income is met if the applicable requirements in subsection 204.2(2) of the Regulations are met.

Aleksandra Bogdan
2023-0968811

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.