A review of how the Canada Revenue Agency (CRA) administered the 2023 filing requirements for bare trusts finds that the main issue was burdensome legislation.<\/p>\n
“[T]he primary barriers the CRA faced in its administration of the bare trust filing requirements were not administrative but legislative, because the concept of bare trusts in the legislative wording was too broad,” says a report<\/a> from the Office of the Taxpayers’ Ombudsperson, dated March 5. It describes the legislation as “burdensome.”<\/p>\n
“All of this was wasted time and effort,” the report says.<\/p>\n
Despite the filing exemption for 2023, the CRA told this publication in early July 2024 that 52,000 trust returns had been filed for bare trusts for 2023<\/a>. These taxpayers can’t be compensated for their legal and accounting costs, because the Income Tax Act includes no provision for the CRA to do so. As such, “many may have lost confidence in the tax system,” the Taxpayers’ Ombudsperson report says. (The report also notes that these taxpayers’ bare trust information won’t be removed from the CRA’s databases, because the agency has a legal obligation to retain the information.)<\/p>\n
Expanded trust reporting legislation, aimed at transparency of beneficial ownership information in order to counter tax evasion, passed in 2022 and was effective for trusts with year-ends on Dec. 31, 2023, and after. With the rules, the majority of trusts, including bare trusts, are required to file a T3 return on time or face penalties. (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.)<\/p>\n
In a bare trust arrangement, the trustee generally holds legal title to the trust property but is unable to take any action without direction from all beneficiaries. Examples of bare trusts could include co-signed mortgages and joint bank accounts.<\/p>\n
“[M]any taxpayers may not know they are in a bare trust arrangement,” the Taxpayers’ Ombudsperson report says. “This could be a parent who controls their child\u2019s bank account or co-signing their child\u2019s mortgage, or a child who is helping their aging parents by helping them manage their bank account.”<\/p>\n
Given the challenges with the expanded reporting, the CRA provided a blanket filing exemption to bare trusts for the 2023 tax year<\/a> at the end of March 2024, mere days before the trust return filing deadline of April 2, 2024. The last-minute reversal led to widespread frustration<\/a> among tax practitioners and taxpayers, prompting the review<\/a> by the Taxpayers’ Ombudsperson.<\/p>\n
While the CRA took steps to communicate the new trust reporting legislation, the agency was “limited in the guidance it could provide [about bare trusts] because it had no legal authority to provide legal advice to taxpayers,” the report says.<\/p>\n
“Whether or not a particular arrangement is a bare trust depends on the specific facts of each situation, as well as the applicable law,” it says. “In addition, the legal principles applicable to trust relationships vary depending on the relevant province or territory.”<\/p>\n
Also, the CRA didn’t provide “relatable” and “clear” examples of bare trusts to help taxpayers, the report says. It also calls out a lack of timeliness, saying the CRA released information on bare trusts one year after the legislation passed. The lack of timely communication contravened certain taxpayer rights and increased compliance costs.<\/p>\n
“We heard of small businesses that spent thousands of dollars on hiring new staff, training employees, and filing returns for clients” and “that some tax preparers hired lawyers to support their team and help make sense of their clients\u2019 compliance obligations,” the report says. “It was not helpful that the CRA provided information after tax preparers had already completed preparations and training for the upcoming tax season.”<\/p>\n
The report also questions the length of time it took the CRA to consider a filing exemption. “Specifically, we do not know why the CRA did not provide an exemption in November 2023 instead of approving penalty relief,” it says. “The justification provided to senior CRA executives for the penalty relief did not appear to differ greatly from what was provided for the filing exemption.”<\/p>\n
Once the exemption was finally announced, bare trusts that had already filed “did so for no reason, and in many cases at great expense,” the report says. By March 12, 2024, 4,652 bare trusts had filed, it says. (On March 12, the CRA said it would apply a gross negligence penalty<\/a> in only the most egregious cases in which a bare trust failed to file.)<\/p>\n
On Aug. 12, 2024, technical amendments to the trust reporting legislation, which effectively removed the filing requirement for 2024 and exempted more bare trusts from the expanded trust reporting rules,<\/a> were published for consultation.<\/p>\n
He also noted that during the consultation, the Joint Committee on Taxation of the Canadian Bar Association and CPA Canada<\/a> asked for “more workable exemptions covering common low-risk situations.”<\/p>\n
Under the draft legislation<\/a>, a trust \u2014 including a bare trust \u2014 is exempt from a filing requirement when all trustees and beneficiaries are related to each other; the property’s fair market value (FMV) doesn\u2019t exceed $250,000; and the trust\u2019s assets consist of only cash, GICs, mutual funds, personal-use property and securities traded on a designated exchange (as well as certain other assets).<\/p>\n
With files from Rudy Mezzatta.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"