A last-minute decision to exempt new bare trust filing requirements led to “wasted time and effort,” according to a new report from the office of Taxpayers’ Ombudsperson François Boileau.
The Canada Revenue Agency (CRA) didn’t provide timely information to allow taxpayers and tax professionals to prepare for the new filing requirements and what was provided was less than ideal, the 80-page report suggests.
Boileau launched an investigation into the bare trust filing last summer after hearing multiple complaints about the CRA’s 11th-hour decision to exempt bare trusts from trust filing requirements that took effect for the 2023 tax year.
A bare trust relationship is one where a person, known as a trustee, has legal ownership of a property or asset but doesn’t hold beneficial ownership. In such a relationship, a “trustee can take no action without instructions from that beneficiary and the trustee’s only function is to hold legal title to the property,” according to the government’s definition.
Unlike express trusts, where people seek out a lawyer to create a trust, bare trusts can happen almost accidentally — when a parent cosigns a mortgage for a child and becomes partial owner, or when an aging parent lists their children on a bank account to help pay the bills.
Taxpayers with a bare trust were told they had to file their forms by April 2, 2024. But with just days to go before that deadline, the CRA announced it would be pausing the requirement due to an “unintended impact on Canadians.”
Boileau’s report said that while the decision to make bare trusts exempt came was the “right one” but that it came “extremely late.”
“One thing that remains unclear is why the CRA took so long to consider an exemption,” the report reads. It points out that the tax agency had announced in November of 2023 that it wouldn’t enforce penalties for late filers except in extreme cases.
“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,” the report says.
More than 40,000 Canadians filed the T3 tax form despite the 11th-hour pause last year. Many had paid pricey tax-filing fees to complete their forms before the exemption was announced.
“The bare trust exemption meant that all of the bare trusts who had already filed did so for no reason, and in many cases at great expense,” Boileau’s report reads.
“Taxpayers and representatives should not have been left to spend months trying to understand the legislation when the CRA ultimately exempted bare trusts from the filing requirements. All of this was wasted time and effort.”
The report notes that many taxpayers argued that they should be compensated for fees they had paid to file their forms.
“The CRA can only work within the framework of the law, and the law does not allow it to compensate taxpayers in this regard,” the report says.
Lack of ‘clear and timely information’
The report also raised concerns with how the new rules were communicated to taxpayers.
“The CRA did not provide clear and timely information when it could have,” the report reads.
The tax agency released a list of “frequently asked questions” on its website in December 2023. The report criticized this as an “outdated” way of communicating the information. It also said the information came too late, as tax professionals usually begin preparations for the upcoming tax season in the fall.
The report also noted that the CRA seemed to be aware that they hadn’t released enough information on bare trusts.
“In November 2023, when CRA officials briefed their senior management, they indicated that the ‘CRA communication has never included information for bare trusts'” the report says.
The new rules were meant to target money laundering, terrorist financing and tax avoidance. But a number of Canadians who had rather simple bare trust relationships found themselves scrambling to file the forms.
Taxpayers might not have been aware that they were even a part of a bare trust, which the CRA itself acknowledged according to Boileau’s report.
The tax agency made efforts to help clarify what a bare trust is and if taxpayers fell under the new filing rules. But those efforts were lacking, the report says.
One of the examples the CRA publicly cited as a “common” bare trust involved property developers. Boileau’s report said this example “may not be helpful to some Canadians, as many affected taxpayers are not property developers.”
Other examples were circulated within the tax agency but never shared with the public.
“The CRA provided examples internally to its officials and employees of what a bare trust is, but did not do so for taxpayers,” the report reads.
The report says the CRA didn’t want to provide more examples to the public to avoid “inappropriately” providing legal advice. But the report says making “relatable” examples public could have been helpful for taxpayers.
The report criticized a push to advertise the changes on social media for not adequately promoting awareness of the issue. It also found that the CRA’s trust filing webpage was set to be updated, but that the target date to publish would have been after the filing deadline.
“Taxpayers and representatives should not be left by themselves to figure things out. The CRA needs to communicate better, faster and more effectively,” the report reads.
Administration of new requirements ‘burdensome’ on CRA
The report suggests that much of the issues arose from how the legislation that introduced the new rules — which were passed in December 2022 — was worded.
The CRA isn’t responsible for drafting legislation, but it does consult with the Department of Finance when tax changes are in the works. Any consultations between the two government agencies are confidential.
Boileau’s report acknowledges that the CRA was tasked with “administering legislation that was burdensome,” largely due to broad wording of the law.
There is no legal definition of a bare trust in the Income Tax Act and the legislation that introduced the trust filing rules had a fairly open-ended definition of the concept, the report said.
“The broad and complex nature of the legislation on bare trusts made the requirements difficult to administer while ensuring compliance. As a result, the CRA had a limited ability to provide sufficient guidance to taxpayers,” the report reads.
Boileau recommended that the CRA conduct a series of internal reviews, including on how it communicates tax changes with Canadians and how it works with the Finance Department when tax legislation is being drafted. He also said the tax agency should look into whether it can create a separate and less complicated T3 form for bare trust filers.
In October, the CRA announced another exemption for bare trust filings for this coming tax season. The Finance Department announced further consultations to clarify the trust filing rules this past summer.