A Canada Revenue Agency sign outside the National Headquarters at the Connaught Building in Ottawa on March 1, 2021.Justin Tang/The Canadian Press
Geoffrey Turner is a Toronto tax lawyer and adjunct professor at the University of Toronto Faculty of Law and Osgoode Hall Law School. He was the Conservative Party candidate in Etobicoke Centre in the 2021 federal election.
Mere days before the April 2 trust filing deadline, the Canada Revenue Agency announced that bare trusts will not have to file a T3 return for 2023 after all.
This is a sensible decision, but it came far too late, on the last business day before the Easter long weekend preceding the due date. Many Canadians affected by the new trust reporting rules had already filed or substantively completed their returns. These law-abiding taxpayers had struggled to understand whether they were caught by the new rules, and incurred substantial fees for accounting and legal professionals to help them prepare their returns. Now they are belatedly told all this was unnecessary.
The new trust reporting rules were first proposed in the 2018 federal budget and ultimately became effective for the 2023 calendar year. Their ostensible purpose was to bring all trusts within CRA’s system and thereby minimize leakage from unreported trust income.
Previously, trusts with no income were generally exempt from the requirement to file an annual T3 return. The new rules eliminated that exemption for most trusts, and required the trustees to file a return detailing information about the trust’s settlors, trustees and beneficiaries, even where the trust has no income and no tax payable, with significant penalties for failure to file.
More problematically, these rules were extended to so-called “bare trusts,” where a person owns property merely as agent for another person. Many Canadians unknowingly established bare trusts in common family circumstances, such as being added to their elderly parent’s joint bank or investment account, or holding title to their child’s home to help them obtain a mortgage. It was challenging for taxpayers and their advisers to assess these situations and how the new bare trust rules applied. All that effort and expense now seems wasted.
There was no need to extend the new trust reporting requirement to these types of innocuous family arrangements or other commercial bare trust agency relationships. The decision to make the rules so expansive in the first place was out of touch with the realities of Canadian life and insensitive to the costs of complying with them, particularly where no additional tax revenue was expected to result. The belated filing relief for bare trusts now corrects this overreach, at least for the 2023 taxation year. It should be made permanent.
While CRA will be blamed for this debacle, it’s not entirely CRA’s fault – their job is to administer the tax laws as enacted. Responsibility for designing the trust reporting rules, and accountability for making them overbroad and underestimating the consequences, lies with the Department of Finance, under political direction from the minister and her staff.
It is unfair for the government to impose unnecessary and confusing reporting rules, insist that Canadians must obediently comply by the stated deadline and then abruptly change those requirements at the last minute after most people have diligently filed. It further corrodes trust in the competence and legitimacy of our government.
We have a voluntary self-assessment system for tax reporting, and we rely on Canadians’ sense of civic duty to honestly report their income, pay their taxes and comply with the law in a timely manner. Having done so by filing their bare trust T3s before the deadline, and now being told their efforts and fees were in vain, many Canadians may now feel punished for doing the right thing. Should they now be compensated for their costs of complying?
The eleventh hour reversal might have been excusable, except this is not the first time and is becoming a disturbing pattern. Just last Oct. 31, 2023, which was the already extended deadline to file the first underused housing tax return for 2022 (originally due May 1, 2023), CRA announced a further six-month extension to a similarly overbroad new compliance obligation. Repeatedly deferring filing deadlines right before the due date undermines the government’s credibility, disadvantages taxpayers who comply before the extension, and rewards and encourages delinquent behaviour.
This sorry episode is further evidence of a government that keeps imposing new taxes and expanded disclosure and reporting requirements with systematic indifference to the mounting compliance burden borne by taxpayers. It shows the failure of tax policy directed by political operatives who have inadequate appreciation of the impact of their proposals on taxpayers. We must urgently refocus tax policy to reduce complexity and unwarranted compliance costs, and restore Canadians’ faith in the integrity of our tax system.