Bad guys go free, compliant Canadians burdened with new trust rules

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Countries around the world have been racing to introduce transparency requirements in many different areas of the law. Examples include corporate shareholder registries, required disclosure when implementing certain tax transactions and trust beneficiary reporting requirements.

Canada is not immune from this trend. In recent years, the country has expanded some of its existing laws by increasing the amount of information that is required to be disclosed on existing forms (such as the ownership of certain foreign property under forms T1135 and T1134). It has also introduced a new federal corporate ownership registry (other provinces like Ontario and British Columbia have followed suit), mandatory disclosure of certain tax transactions, the debacle that is the Underused Housing Tax and trust reporting rules. All the new rules are accompanied by significant penalties for non-compliance.

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The Canadian government states the usual rhetoric that the proposed rules are being introduced to comply with “international best practices,” reduce money laundering, assist with the enforcement of proper tax compliance, etc. But do these types of rules actually do that? Or do they encourage even more non-compliance?

One can debate the pros and cons of these types of rules forever, but put me on record as stating that the “bad guys” will never comply with such requirements and, accordingly, the rules will miserably fail at achieving their objectives.

In the meantime, these massive new reporting requirements are pushed onto the average tax-compliant taxpayer who wants to comply with the law. Unfortunately, the amount of required disclosure to comply is often voluminous, may not be available and may lead to a significant increase in professional fees. All for what? To make the Canada Revenue Agency’s job (or those of other government administrators) easier to review or audit? Perhaps.

It should be obvious to the casual observer as to the overall benefits to a country for proper adherence of laws. But there is a tricky balance between proper compliance and placing reporting burdens on taxpayers. At some point, the scale tips in favour of wasting valuable resources for little or no positive outcome. In other words, the amount of energy and resources spent on ensuring one is compliant results in little or no overall societal benefit.

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For those who might think the expanded or new reporting rules are a boon to the accounting/tax profession (more fees), think again. There are not many accountants/tax preparers who relish these new rules. They are already overworked given the huge shortage of accountants and demands on their time.

For example, the new trust reporting rules are very burdensome. After determining if the new rules apply to a trust, the trust then requires separate disclosures on a whole bunch of information such as who the beneficiaries are (alive or unborn), the person(s) who created the trust and the identification of those who control the trust, including all their tax identification numbers.

The new rules also apply to “bare trusts” — a type of arrangement under which the trustee of the trust can reasonably be considered to act as an agent for all the beneficiaries under the trust with respect to all dealings with all the trust’s property.

Bare trusts are commonly used in many routine types of transactions (such as real estate purchases and disposition transactions). Simple and routine scenarios such as co-signing for a child’s mortgage or including yourself on your aging parents’ bank accounts may create a bare trust and a filing obligation under the new rules.

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There are likely hundreds of thousands of these types of arrangements in existence, with many new ones created daily. It is rare to achieve tax mischief when using such arrangements since the beneficiaries are ultimately responsible for any tax reporting and consequences. However, as mentioned, the existence of these types of arrangements are now required to be reported under the new rules. Why? Good question.

Given the above requirements, there’s no shortage of questions as to how Canadian taxpayers and their accountants will be able to properly comply with the new trust reporting rules. If they do not, the penalties can be severe, with the most severe penalties reserved for those who do not file under circumstances amounting to gross negligence — the greater of $2,500 or five per cent of the highest amount of the fair market value of the trust property held during the year. Ouch. Accordingly, for those planning not to file or to loosely adhere to the rules, beware.

Consider co-signing a mortgage for your child on a $500,000 home — likely a bare trust arrangement — only to learn years later that there are penalties of $25,000 per year plus interest. Is this what the rules intended and is that fair for the average Canadian without access to tax experts?

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The first year of these new trust reporting requirements has many Canadian taxpayers and their advisers concerned. We’ve had approximately five years to get ready for these rules, but the amount of information required to properly file and avoid penalties can be daunting. (For interested persons, Canadian Tax Matters (an organization that I am a part-owner of) is putting on a webinar on the new trust reporting rules later this month.)

Overall, I question the flurry of new “transparency” requirements. Some will obviously cheer on these new rules (“the more information provided to the government the better”), but the more balanced approach is to have reasonable and required disclosure of matters (with appropriate and not crushing penalties for non-compliance) and not overburden the average compliant Canadian with unnecessary information since the “bad guys” will never comply with these requirements.

The balance needs to be restored.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is www.linkedin.com/in/kimmoody.

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