The Department of Finance should amend the trust reporting rules to prevent a repeat of this spring’s bare trust debacle, tax practitioners say.
While the Canada Revenue Agency (CRA) is under scrutiny for how it administered the trusts’ filing requirements, including announcing its filing exemption for 2023 mere days before the deadline, the issue can only be properly addressed through legislative change.
“Finance needs to amend the legislation to better align the rules with the policy intent and ensure that trust reporting for bare trusts does not place an unfair burden on taxpayers,” said John Oakey, vice-president of taxation with CPA Canada in Dartmouth, N.S.
Returns for trusts with a year end of Dec. 31, 2024, including bare trusts, are due March 31, 2025. But the current reporting rules for bare trusts are untenable without a clear definition of a bare trust, Oakey said. Bare trusts are not defined in the Income Tax Act.
Emily Mantle, founder of CPA Compass in Sudbury, Ont., said she would like to see the government focus directly on the types of bare trusts it finds concerning and to exempt ordinary arrangements.
“When you [as an advisor] start dealing with somebody who [has a bare trust reporting requirement] just because they’re on legal title of a house, that’s a lot for the CRA to administer,” Mantle said.
The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada will ask Finance this week to change the existing legislation, Oakey said.
Among the recommendations, the committee will suggest Finance define a bare trust for purposes of the reporting requirement, and expand carveouts to the trust reporting requirements — for example, raising the $50,000 asset threshold below which a trust has a filing exemption.
The CRA told Investment Executive it would work with Finance “over the coming months … to further clarify its guidance on filing requirements” for 2024 and future year bare trusts.
A Finance spokesperson said they had nothing to add to the CRA’s statement when asked whether the department was considering amending trust reporting legislation.
Under common law, a bare trust exists when a trustee’s only duty is to transfer property to a beneficiary on demand. A bare trust could be used for tax avoidance or evasion, or to hide the true ownership of ill-gotten gains, but in most cases bare trusts are used for legitimate reasons. An in-trust-for account for a grandchild or an adult child being named a joint owner of a parent’s bank account are possible examples of bare trusts.
The federal government first proposed stricter trust reporting rules in the 2018 federal budget in a bid to help stop “aggressive tax avoidance, tax evasion, money laundering and other criminal activities.”
Finance then published draft legislation in early 2022 that included bare trusts within the proposed rules. Tax practitioners advised then that the rules cast too wide a net, but the government nevertheless passed the legislation in December 2022, effective for 2023 and subsequent years’ trusts.
However, as the 2023 filing deadline for trusts drew nearer, taxpayers began wondering if they had a bare trust in place and sought advice on how to comply with their new filing obligations.
In December 2023, the CRA said it would not assess penalties on late-filed 2023 bare trust returns in response to the “unintended impact” the rules were having on Canadians. In mid-March of this year, the CRA said it would not assess gross-negligence penalties for failing to file 2023 bare trust returns, except in egregious situations.
Finally, on March 28, the CRA provided taxpayers with a blanket exemption from bare trust filing requirements for 2023, except in cases where the agency made a direct request to file.
Mantle said she helped her clients gather information for their bare trust returns ahead of the deadline, but held off on filing them, anticipating the CRA might provide a last-minute exemption. “I basically wrote it all off. I didn’t charge anyone [for the work],” Mantle said.
In response to questions from Investment Executive, the CRA said it’s received more than 52,000 bare trust returns for 2023 as of July 10 — none of which were filed in response to a direct request from the agency. The CRA also said it hadn’t imposed any late-filing or gross negligence penalties in connection with bare trusts.
On July 10, the Office of the Taxpayers’ Ombudsperson launched a systemic examination of how the CRA administered bare trust filing. The office suggested it was concerned that the agency had not provided timely guidance to taxpayers and that it had not adequately factored in taxpayers’ cost to comply with the rules.
Tax practitioners generally applauded the announcement, but some believed the focus was misplaced.
“An examination of CRA is not what we need,” said Hugh Neilson, a tax consultant in private practice in Edmonton, in a Linkedin comment posted July 11. “We need an examination of the process that led to this hot mess of legislation ever being handed to CRA to administer.”
Oakey suggested the Taxpayers’ Ombudsperson would have “difficult analysis to do,” determining which entities bore what share of responsibility for the bare trust filing issues.
“[CRA] may take some blame here, but individuals I worked with at [the agency] were really good with trying to do the best they could to make this system work,” Oakey said. “When the legislation is designed in a way that doesn’t provide you the ability to administer [it] — other than to administratively create your own [rules] to make it work — it’s just unworkable.”
Trust reporting and bare trusts
The expanded trust reporting rules were originally meant to be effective for the 2021 tax year, but the effective date was delayed twice, pending the passage of enabling legislation late in 2022. The new legislation is effective for trusts with year-ends on Dec. 31, 2023, and after.
Under previous legislation, generally only trusts with taxes payable for the year or those that disposed of capital property needed to file an annual trust income tax return (T3). Under the expanded reporting requirements, express trusts (as opposed to those created by law) as well as bare trusts must file a T3: Trust Income Tax and Information Return, and a Schedule 15: Beneficial Ownership Information of a Trust, with the CRA on an annual basis.
The rules require trusts to identify all beneficiaries, trustees, settlors and/or protectors of the trust, including their addresses, dates of birth and taxpayer identification numbers, such as social insurance numbers.
Certain trusts are excluded from the expanded rules. These include graduated rate estates; qualified disability trusts; mutual fund trusts and registered plans; trusts in existence for less than three months; and trusts with less than $50,000 in asset value — if those assets consist of only cash and securities traded on a designated exchange (and other certain assets).
In addition to the existing penalty for failing to file a T3 return on time — $25 a day, with a minimum penalty of $100 to a maximum of $2,500 — the new reporting rules introduce an additional penalty for deliberately not filing or for gross negligence: $2,500 or 5% of the property’s value, whichever is greater.
The T3 and Schedule 15 filing deadline for most trusts for 2023 was March 30, 2024. Since that date fell on a Saturday, the CRA considers a T3 return filed on time if the CRA received it, or it was postmarked, on or before April 2 (the next business day).