New CRA reporting rules for trusts are a disaster

Have you added your name to the legal title of your daughter’s new home to help her obtain a mortgage? Or opened an “in trust” bank or brokerage account for your grandson to help fund his education down the road? If so, you have a problem, and these are just two examples of many.

Under new tax reporting rules that apply to years ending after Dec. 30, 2023, you could be liable to a penalty of up to five per cent of the fair value of the home or “in trust” account if you don’t report the arrangement, even if there isn’t a penny of tax owing. The purpose of these rules is to counter tax evasion, money laundering and other criminal activities. Their likely effect will be to put thousands of innocent Canadians on the wrong side of the law.

Like many government initiatives, this one started with the best of intentions: greater transparency. If a person has legal title to a property but holds it for the benefit of the “true owner” — someone who controls it and is entitled to all its earnings — a reporting requirement will help the government ferret out illicit arrangements if that “someone” is a scoundrel. That was the theory. But then the bureaucrats weighed in and the rules spiralled out of control.

Under the old rules, a trust was generally only required to file a tax return if it had tax to pay or sold a property. And there was never a requirement to file where one person held legal title to an asset as agent for someone else: that “someone else” was required to declare all taxable income from the asset — and still is.

The new rules require a “bare trustee” — a person or corporation that has legal title to an asset as agent for the true owner — to file an annual trust return even if the bare trustee owes no taxes. There are some limited exceptions: for example, a return is not required if the arrangement involves assets with a value of no more than $50,000, provided the only assets are cash, listed securities or government debt obligations. If there are any other assets, such as a GIC, you have to file.

For a trust with a year end of Dec. 31, 2023, the return must be filed by April 2 this year. The penalty for latefiled returns is a maximum of $2,500. But the new rules are so complex even tax professionals are struggling to understand them: as a result, the Canada Revenue Agency has waived the penalty for bare trusts for the first year.

But now there is a second penalty: five per cent of the highest value of the trust assets during the year if the failure to file was deliberate or the result of negligence. So, if you added your name to your daughter’s home to help her get financing, you could face a penalty of five per cent of the property’s value for every year you fail to file the form.

It could add up. Assume that 10 years from now, the CRA starts sniffing around and discovers you are a “bare trustee” of your daughter’s home but never reported. The property has a value of $1 million and, at the five per cent rate, the CRA charges you a penalty of $50,000 a year plus interest. “But no tax was owing,” you say. “It doesn’t matter,” the CRA replies.

The absurdities continue. For commercial reasons, many corporate groups in real estate development or oil and gas exploration use nominee corporations to hold legal title to assets, with other corporations being the “true owners” — in other words, bare trusts. A large corporate group with many projects may now have to complete hundreds of filings each year at a very significant cost: the new reporting forms are excruciatingly detailed.

How we got to this sorry state is a long story. Canada has a self-assessment tax regime: you report the tax you owe and can be in serious trouble if you do not. Increasingly, however, taxpayers must now also report their arrangements even if there is no tax owing at all, with onerous penalties simply for failing to file a government form.

Government intrusion requires reasonable limits. Just days ago, a U.S. district court struck down as unconstitutional U.S. rules that require reporting of “true ownership” interests. Ottawa should scrap its own initiative and start over with a blank sheet of paper. Let’s go after the scoundrels and forget about plain-vanilla family and commercial arrangements. Catching the real scoundrels, not fabricating new ones, was the point, after all.

LIKE MANY GOVERNMENT INITIATIVES, THIS ONE STARTED WITH THE BEST OF INTENTIONS.