The Canada Revenue Agency clarified it won’t apply penalties for Canadians who are late in complying with certain new tax filing obligations for trusts, except in narrow cases of gross negligence.
The updated guidance provides relief for many taxpayers who’ve been asked for the first time this tax season to share information about what are known as “bare trusts,” which often aren’t documented in writing.
The new federal reporting requirements, which are meant to increase transparency around trusts, affect many Canadians who had their names added to a family member’s home title or financial accounts, even if a taxpayer didn’t intentionally or formally create a trust. The deadline to submit the required forms for the 2023 tax year is April 2.
The CRA said on Tuesday it won’t charge standard penalties for taxpayers who submit their 2023 bare trust returns after the deadline. It also said it will apply a more severe kind of penalty for people who fail to submit the required paperwork only “in the most egregious cases” of gross negligence.
The agency had indicated in December that it would avoid regular penalties for late bare trust returns. But it also said it would still apply the more onerous penalties when it deemed taxpayers “knowingly” failed to file or did so owing to gross negligence.
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That wording had sparked concern among tax accountants who were racing to meet the new filing requirements by the April deadline this year, said John Oakey, vice-president of taxation at Chartered Professional Accountants (CPA) of Canada, which represents the profession nationwide.
The worry was that Canadians who knew they had to file but couldn’t complete the forms in time might be faced with the gross negligence penalties, Mr. Oakey said.
“The CRA’s decision back in December to provide pro-active relief was a step in the right direction,” Mr. Oakey said in an e-mail statement. “However, as CPA Canada dug into the details, we still had concerns about the work required by tax practitioners, as well as Canadians’ ability to meet the April 2 deadline.”
The new guidelines on penalties from the CRA assuaged those concerns, Mr. Oakey said, as the agency made it clear it will only pursue blatant cases of gross negligence.
A trust is a legal structure that separates 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, known as the beneficiaries. In a bare trust, the trustee can only act at the instruction of the beneficiary.
Among other changes, the new rules require that bare trusts, with limited exceptions, file a yearly T3 Trust Income Tax and Information Return starting with the 2023 tax year, an obligation from which they were previously exempted.
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The CRA had announced Dec. 1 it would waive late-filing penalties for bare trusts that submit their T3 returns for the 2023 tax year after the deadline.
That penalty amounts to $25 a day for each day of delay, from a minimum of $100 to a maximum of $2,500.
Gross negligence penalties are the greater of $2,500 or 5 per cent of the highest fair market value of all assets held in the trust within a given year.
The CRA said Tuesday it will only apply those larger penalties only as part of a compliance action such as an audit, “where all factors and circumstances of the taxpayer’s particular situation are considered together.”
It also said a gross negligence penalty for failing to file a bare trust return would have to be approved by CRA headquarters.
The penalty relief, however, is limited to bare trusts returns for the 2023 tax year.
