Bare trust debacle shows CRA needs to learn to respect taxpayers

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One of my favourite vocalists of all time is the Queen of Soul Aretha Franklin. I particularly loved her soulful style which was on great display during one of her greatest anthems Respect. The way she spelled out the words of “respect” during the song was classic.

That song instantly came to mind last week when the Canada Revenue Agency said bare trusts would now be exempt from the new trust reporting requirements that have been much lamented. While that announcement was certainly welcome, it came just five days before the filing deadline for trusts.

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In the meantime, tax professionals and trust taxpayers have been struggling mightily with the new trust reporting regime (which requires significant and invasive disclosures of trust beneficiaries, settlors and trustees). These “new” rules were first proposed in the 2018 federal budget to come into effect for the 2021 taxation year, but were delayed twice and so the 2023 taxation year is the first time they are law.

However, the Department of Finance in 2022 added a surprise reporting requirement to the draft legislation that “bare trusts” (a type of trust akin to an agency relationship and is ignored for all purposes of the Income Tax Act) also need to be reported.

There are hundreds of thousands of bare trust relationships in existence in Canada, with most of them being very benign. The Department of Finance was presented with significant feedback as to why bare trusts should be exempt from the pending reporting requirements. However, such feedback was simply ignored.

The CRA was tasked with administering the new reporting rules and they, along with the tax practitioner community, mightily struggled to determine whether a legal relationship was a trust and/or a bare trust that needed to be reported.

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As an example, my colleague — Jay Goodis of Tax Templates Inc. — and myself put on a webinar through our organization — Canadian Tax Matters — on the new trust reporting rules and more than 500 tax professionals attended. We answered hundreds of questions during and after the session about the application of the new rules. The questions were very difficult to answer.

Five days before the filing deadline, the CRA announced bare trusts will be exempt from filing. This, after practitioners have wasted a ton — and I mean a ton — of time on determining whether a legal relationship needs to be reported. Such time translates into significant professional fees being generated to trust taxpayers.

Some cynics might say, “Well, tax professionals are benefiting from these rules with the increased fees.” I’ll just say such a comment is not worth even responding to. Virtually all good tax professionals that I know do not relish the extra fees and time in an already time-crunched period where there is more work than they can already handle given the huge shortage of accountants. Especially when it is doubtful what such reporting will yield and benefit Canada as a whole.

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If the above story sounds familiar, it is. The Underused Housing Tax (UHT) debacle should come to mind. Overly simplified, Canadians are exempt from this new tax. But if you own property through a Canadian trust, partnership or corporation, you still had to file a return in order to claim the exemption. If you did not, you risked significant penalties.

For the 2022 taxation year, the necessary UHT filings were due April 30, 2023. Shortly before that deadline, the CRA announced an extension to Oct. 31, 2023. On the afternoon of Oct. 31, 2023, the agency announced a second extension of the filing deadline to April 30, 2024.

Such late announcements are, again, welcome, but let’s be serious: by then, most of the work and effort has already been done. A ton of time and effort has been expended — and thus wasted — if such filings are not required or due on that date.

Do professionals want the filings to be required? Of course not. What they want is simple respect. This train wreck was easily predictable and such predictions came true. Instead of disrespecting Canadian taxpayers and their advisers by outright dismissing early feedback, feedback could have and should have been better listened to before implementation.

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Over the last two months, impacted professionals have lost sleep, and worked nights and weekends only to be told hours before the deadline the rules are changing. Contrast that with the CRA’s headcount doubling in the past four years, significant budget increases at the CRA, the high percentage of questions CRA gets wrong when taxpayers call, the long wait times to get through and the long timelines for assessments even though when the CRA finally gets around to working on a taxpayer’s matter sometimes years later, there are short timelines, often 30 days, to give the information it needs.

It is well known that Canada has a serious productivity challenge. Even the Bank of Canada’s leadership recently commented on this by saying it’s time to “break the glass” and deal with those problems. Examples of the UHT and trust reporting debacles certainly contribute to those challenges when you have taxpayers and their advisers scrambling for months only to be told at the last minute to the effect of “we’re just kidding.” That is simply not respectful.

I’ll keep beating the drum that it’s time for serious tax reform and review. It’s necessary to deal with Canada’s productivity challenges and to bring back some simple respect to Canadian taxpayers.

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In addition, debacles such as the UHT, trust reporting and the 2017 private corporation tax proposals, shine a strong light on the fact that it’s time for a serious discussion on how tax policy is developed in Canada.

Having such policy development under the sole purview of the Department of Finance should be up for review. It should be a much more open and transparent process than the secretive and closed process (with only limited engagement of stakeholders when it is deemed necessary) that currently exists. At a minimum, the communication lines between the finance department, the CRA and stakeholders needs significant improvement.

Aretha, it’s time for you to belt out your anthem. Department of Finance and CRA, it’s time for you to listen. And to respect.

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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