Catching Up a Family Trust Before CRA Came Looking

The situation

Femi built his career as a technology executive, but for the past several years most of his income had flowed through a personal consulting corporation rather than an employer's payroll. His spouse Adaeze worked as a surgeon. Years earlier, on the advice of their accountant, the couple had set up a discretionary family trust that held a class of shares in Femi's corporation. The trust let the corporation pay dividends to the trust each year, which the trustees could then allocate among family members, including their two adult children, who were in lower tax brackets. It was a common income-splitting structure, and it had worked quietly in the background for years.

The trust itself never filed anything with the Canada Revenue Agency. There was nothing sinister about that. For most of its life, the trust had no tax payable of its own — the dividends it received were allocated out to beneficiaries each year and taxed in their hands, and under the old rules a trust with no tax owing and no income retained often did not need to file a return at all. That changed. Starting with more recent taxation years, the federal government expanded the trust reporting rules so that most trusts, including many that owe no tax whatsoever, now have to file an annual trust income tax return along with a detailed schedule disclosing the identity of every trustee, beneficiary, and settlor. The family trust had missed two full years of these filings by the time anyone noticed.

What the review found

Giulia, the couple's longtime accountant, caught the gap during a year-end review and flagged it immediately. She had prepared the corporation's returns for years but had never been engaged to file anything for the trust itself, because under the old rules there had been nothing to file. Once she worked through the new requirements, she realized the trust likely met the definition of an express trust required to file — a trust deliberately created with clear terms, as opposed to one arising automatically by operation of law — and referred the couple to our team to sort out the legal side before the filings went in.

Two things made this more than a paperwork inconvenience. First, the new disclosure schedule asks for identifying information, including addresses and taxpayer identification numbers, for every trustee, every beneficiary, and the person who settled the trust — information the trust deed had never needed to compile in one place before. Second, the penalty structure for a trust that fails to file is not fixed. A late-filing trust return normally draws a modest daily penalty, but where the failure is found to be a knowing act or the result of gross negligence, the Income Tax Act allows for a much larger penalty calculated as a percentage of the fair market value of the property the trust holds at year end, subject to a minimum dollar amount. The family trust held shares in Femi's corporation that an independent valuation, prepared as part of this review, put at roughly $650,000. That figure sat squarely inside the range that made the compliance gap worth taking seriously rather than quietly fixing and hoping nobody asked.

The trust deed itself also needed a close read before anything was filed. It named three trustees, including Femi and Adaeze personally, and described a class of discretionary beneficiaries that, on a plain reading, was broader than the family had been treating it as in practice. Getting the disclosure schedule right meant first getting clear, on paper, about exactly who the trust's trustees and beneficiaries actually were.

What we did

1. Reviewed the trust deed and corporate share structure. We confirmed the trust was validly constituted, identified the three trustees and the settlor named in the deed, and worked with Femi and Adaeze to compile a complete and accurate list of the beneficiaries actually entitled to consideration under its terms.
2. Assessed the trust's filing obligation and exposure. We confirmed the trust fell within the expanded filing requirement for the missed years and walked the couple through how the late-filing and gross-negligence penalty provisions could apply if CRA identified the gap on its own rather than the family coming forward first.
3. Applied through the Voluntary Disclosures Program. This program allows a taxpayer to come forward and correct a past filing failure before the tax authority contacts them about it, in exchange for reduced or eliminated penalties. Because CRA had not yet flagged the trust for review, the couple qualified. We prepared the application, set out the trust's history and the reason for the gap honestly, and submitted it before the outstanding returns went in.
4. Coordinated the outstanding filings with the accountant. Once the disclosure was accepted, we worked alongside Giulia while she prepared and filed the two missed years of trust returns and the accompanying beneficial ownership schedules, making sure the trustee and beneficiary information matched what the deed actually said.
5. Updated the trust's governance going forward. We drafted a clear annual trustee resolution template and a filing calendar so future distributions and filings happen on schedule, and confirmed with Femi and Adaeze who among the family should hold ongoing responsibility for triggering the accountant's engagement each year.

The outcome

The voluntary disclosure was accepted. CRA processed the two missed years of trust returns under the program's terms, and no late-filing or gross-negligence penalty was assessed against the trust or its trustees. The roughly $650,000 in trust assets that had been exposed to a percentage-based penalty stayed exactly that — an asset, not a liability. The family trust is now current on its filings, and Femi and Adaeze have a clear, written record of who the trustees and beneficiaries are, something the original deed had left more open-ended than the family had realized.

The strategy worked because the family moved before CRA did. The Voluntary Disclosures Program is only available while a filing gap remains undetected by the tax authority; once CRA opens a review or audit, or another taxpayer's disclosure or an information return points them toward the trust, the option closes. Giulia's year-end catch, followed quickly by a legal review of the deed and a properly prepared disclosure, was what kept this a compliance fix rather than a penalty dispute.

It also left the family with something more durable than a clean filing history: a trust deed they now understand, and a process for keeping it that way. Discretionary family trusts are flexible by design, which is exactly what makes them easy to set up once and then forget. The new reporting rules removed the option of quiet dormancy. A trust that holds property now has to account for itself every year, whether or not it earned a dollar of income.

What you can learn from this