Duane Smith, who is affected by the new tax-filing requirements around underused housing and trusts, at home in Calgary, on March 21.Todd Korol/The Globe and Mail
New tax-filing obligations around trusts and real estate investments are forcing many Canadians to spend hundreds – if not thousands – of dollars in accounting and legal fees to disclose to the government informal family financial arrangements, according to a recent Globe and Mail survey.
The new reporting requirements stem from laws that were intended to improve transparency around trusts and discourage foreign investors from leaving residential properties vacant. But the broadly written rules also affect Canadians in ordinary situations, including in some cases couples who own rental property and people who have had their names added to a family member’s home title or financial account.
The rules are also complex, forcing many people to seek professional help to complete the paperwork or verify whether they are legally required to file. Failure to file and mistakes in completing the forms can result in financial penalties as well as tax and legal consequences, experts have warned.
A March online survey conducted by The Globe and Mail through the Carrick on Money newsletter shows those costs are often steep. Of more than 400 respondents who said they were affected by the new tax rules, more than two-thirds reported spending or being quoted over $500 in accounting and legal fees.
Around 36 per cent of respondents had spent or been quoted between $500 and $1,000 in fees. Roughly 16 per cent said they spent or expected to spend between $1,000 and $2,000, and an equal percentage said their costs had surpassed $2,000. The charges are in addition to other routine tax preparation costs.
In Calgary, 59 year-old Duane Smith said the new filing obligations will likely cost his family between $6,000 and $9,000 in accounting fees this year.
That’s because his father added Mr. Smith’s name and that of his two siblings onto land titles linked to his Saskatchewan farm, a common arrangement that can simplify the eventual property transfer. But Mr. Smith said he confirmed with his tax accountant that this setup constitutes what is known as a bare trust, in which he and his siblings hold the land as trustees and are now subject to new tax-reporting rules.
This tax season is the first time that Canadians must file what’s known as a T3 Trust Income Tax and Information Return for bare trusts, which often aren’t documented in writing and were previously exempted from having to report information to the Canada Revenue Agency.
A trust is a legal relationship in which someone called a trustee holds a property 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.
Many Canadians who had their names added to the title of a family member’s home, land or financial account may be considered to be part of a bare trust, even if they never formally or intentionally created such a legal structure. Starting with the 2023 tax year, trustees of a bare trust, with few exceptions, are required to file an annual trust return.
The deadline to do so this year is April 2, although the CRA has announced broad penalty-relief measures for 2023 bare trust returns submitted after that cut-off date.
Mr. Smith’s wife, also the child of a farmer, was added to some of her dad’s land titles as well, as were her two siblings. The couple has been quoted between $1,000 and $1,500 in costs to prepare an initial bare trust return. That fee applies to each of them individually, and to each of their siblings, as each one holds different land titles and must file a separate trust return, Mr. Smith said.
Those fees aren’t unusually large. In Vancouver, Jeffrey Foreman, principal at D&H Group LLP, said his firm charges around $750 for a simple T3 return. More complicated files that require research to collect the information necessary to complete the paperwork can cost as much as $2,000 to $3,000, he said.
Many Canadians are also affected by Ottawa’s underused housing tax (UHT), which took effect at the start of 2022. While the measure imposes a yearly 1-per-cent levy on foreign-owned residential properties considered to be underused or vacant, it also introduced an obligation for some Canadian homeowners to disclose information by filing a UHT tax return.
In November, Ottawa proposed changes that would drop those filing requirements for Canadians, but only for 2023 and following tax years. Affected Canadians must still send in their paperwork for the 2022 tax year and have by the end of April to do so without risking penalties.
A UHT return can cost as little as $500 or as much as upward of $2,500, depending on complexity of the file, Mr. Foreman said.
While those charges represent extra revenue for Mr. Foreman’s firm, the new tax rules have also brought considerable extra workload and costs, he said. The company, for example, has had to invest in additional staff training on the new rules as well as new protocols to be able to securely collect vast amounts of sensitive information that clients must now share with the CRA.
After the initial trust return filings, Mr. Smith said his family will likely have to pay accountants around $500 per person to have the same forms filled out in future years, a smaller but still significant financial outlay.
“It just seems illogical,” he said, noting the government won’t be collecting any new revenue from him and his relatives through the trust returns. “I just want to ask: ‘Why?’”
Editor’s note: (March 26, 2024): In this article, a couple and their two respective siblings had to file separate bare trust returns regarding two family farms. The requirement to file separate returns was particular to this case where the siblings each hold separate land titles linked to the same two farms. In many other cases, tax experts advise that two or more siblings added to a single property title would only have to file one trust return listing two or more trustees.
