Canadians subject to Ottawa’s new trust-reporting rules who don’t already have an accountant or can’t afford professional tax advice face an urgent question: Can regular people, with enough research, fill out the paperwork on their own?
Federal rules aimed at increasing transparency around trusts have introduced new filing and disclosure obligations, including for what’s known as “bare trusts,” which often aren’t documented in writing.
The requirements affect many Canadians who had their names added to a family member’s home title or financial accounts, even if they never intentionally or formally set up a trust. The deadline to submit the required forms for the year 2023 is April 2, and failure to do so can result in penalties.
The onerous new requirements have made it harder for Canadians who don’t already have an accountant to find one, as some firms turn down new clients to manage workloads. And for those using professional advice, the accounting and legal fees incurred to satisfy the new rules can be steep.
But a do-it-yourself approach to filing a trust return is risky, experts warn, adding that errors could have long-lasting tax and legal consequences.
A trust is a legal structure that splits legal ownership from beneficial interest. It is created when a settlor – who owns a property – transfers it to a trustee, who holds legal title to it for the benefit of another person or persons, called the beneficiaries. In a bare trust, the trustee can only act at the instruction of the beneficiary.
Among other things, the new rules require that bare trusts, with some exceptions, file a yearly T3 Trust Income Tax and Information Return, an obligation from which they were previously exempted.
Accountants warn that many Canadians affected by the new rules likely don’t even realize they may be deemed to be part of a bare trust. Common scenarios often involve people who hold title to their adult children’s home because they co-signed their mortgage and those who have their names on their elderly parents’ bank or investment accounts.
For those with similar arrangements, the first step is to understand whether they are, indeed, part of a bare trust. The tricky part is that the Income Tax Act doesn’t define what a bare trust is. And the Canada Revenue Agency has yet to provide guidance on several scenarios, said Gus Patel, a partner at K&P CPAs.
Some accountants are referring clients to lawyers, as assessing whether a bare trust exists can involve complex interpretations of common law.
The rules exempt some bare trusts from the filing requirements, but even determining whether one’s situation fits the exception can be complicated, said Joseph Devaney, a CPA and director at financial education platform Video Tax News.
For example, the rules exempt trusts that hold assets worth no more than $50,000 throughout the year if the money is held in cash, publicly listed securities – such as stocks or bonds trading on an exchange – and a few other types of assets. But the current list of exceptions doesn’t mention dividends receivable – dividends a company has declared but not yet distributed – Mr. Devaney noted. This means trusts holding dividend-yielding stocks may not be eligible for the exemption, he added.
“And every single one of these listed items has little nuances like that,” Mr. Devaney said, speaking of the list of exemptions for bare trusts.
The mere paperwork required to be able to file a trust return electronically may require a trip to a lawyer. To submit the forms online, taxpayers must obtain a trust account number if they don’t already have one. The process involves submitting documents detailing the trust arrangement which, in many cases, would have to be drafted from scratch, Mr. Devaney said.
Most lawyers trained in Canada can assist in the drafting of a bare trust agreement, said Anna Malazhavaya, a tax lawyer and founder of Advotax Law Professional Corp.
But attempting to draft that document without expert guidance can be dangerous, Mr. Devaney warned. “Now you’ve got something that is probably going to have legal implications, something that could potentially be used in court if there’s a dispute or cause significant tax problems,” he said.
The T3 return is riddled with tax jargon that most well-informed taxpayers would struggle with, Mr. Devaney said. Even filling out Schedule 15 – a short form that gathers information about individuals and entities involved in the trust – involves treacherous nuances, he said.
The CRA is waiving late-filing penalties for bare trusts for the 2023 year. But if the tax agency deems taxpayers knowingly failed to submit their paperwork, among other scenarios, the applicable penalty is the greater of $2,500 or 5 per cent of the highest fair market value of all assets held in the trust in a given year.
“That’s my biggest concern,” Ms. Malazhavaya said of the penalties and other potentially serious consequences of getting things wrong. “I would caution everyone against doing it yourself.”
Erica Alini