Accountants and their clients may have spent almost $1-billion trying to comply with controversial new reporting rules for bare trusts before the Canada Revenue Agency announced a last-minute decision not to enforce them for the 2023 tax year, a survey of Canadian accounting firms suggests.
Joseph Devaney, a director at the financial education platform Video Tax News, asked accounting firms in an online survey to reveal how much they had spent and charged in fees to help Canadians abide by the new rules before they were scrapped. He gathered responses from 118 small and medium accounting businesses across the country.
Extrapolating from the survey results, Mr. Devaney estimates the cost of compliance was at least $905-million.
“This number is an indication of just how large the impact is of not getting it right the first time,” he said. “Politicians should be wary of pushing things through too quickly, because the costs are real and they are large.”
The new rules went into effect this tax season, and are part of a larger government push to improve transparency around trusts. They required taxpayers for the first time to file returns for bare trusts, which were previously exempt from filing. The changes were widely criticized for imposing onerous new tax reporting requirements on Canadians with ordinary and informal family financial arrangements that are in some cases considered bare trusts.
Those affected included, in certain cases, parents who had added their names to the titles of their children’s homes to help them qualify for mortgages, and people who had their names on elderly relatives’ financial accounts. The CRA announced late last month, just days before the April 2 filing deadline for trust returns, that it would not require taxpayers to comply with the new rules this year, unless the agency makes a direct request for the files.
The reversal caused an uproar among taxpayers and accountants, who bemoaned the loss of money and hours of work spent on efforts to comply with the complex rules.
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Mr. Devaney said he organized the survey to help calculate the financial losses tied to the government’s about-face. The poll found the companies each spent just under $13,000 on average to train staff on the new bare trust reporting rules, and charged clients an average total of $11,000 for preparing bare trust files that had already been submitted.
The poll’s respondents also reported incurring an average $12,000 each in costs related to preparing bare trust returns that hadn’t yet been submitted, or for which they hadn’t yet billed clients. Those costs will likely be borne by both accounting firms and clients, with tax preparers charging or absorbing unbilled fees to varying degrees, Mr. Devaney said.
To calculate a national total, Mr. Devaney relied on a figure from market research firm IBISWorld for the total number of accounting businesses in Canada, as well as a previous survey of accountants by Video Tax News that had found 12 per cent of respondents did not plan to handle bare trust returns. Based on those numbers and an average total cost of around $36,000 for each firm and its clients, he arrived at his $905-million estimate.
The estimate does not adjust for outlier values that could skew the underlying averages, though Mr. Devaney said there were no responses that stood out as being especially high or low. Also, Mr. Devaney did not analyze the geographical distribution of the firms that responded. And the data does not include costs incurred by the country’s largest accounting firms.
Mr. Devaney described his effort as a first step in estimating the aggregate cost of compliance, which he said is important to do in order to draw attention to the consequences of implementing half-baked tax legislation.
In a March 28 statement announcing the reversal on the bare trust rules, the CRA said it recognized that the new reporting requirements had “an unintended impact on Canadians.”
Part of the struggle for taxpayers and their accountants was that assessing whether a bare trust exists can involve complex interpretations of common law. Several tax preparers told The Globe and Mail they had to refer clients to lawyers.
Some accountants who responded to Mr. Devaney’s survey said in their responses that bare trust filings had caused their firms to fall behind on individual trust returns during a very busy tax season. Others said the last-minute about-face had caused strain with some clients, who had been charged for preparing returns that were no longer necessary.
The move was the second time in four months that the federal government had walked back new tax-filing requirements. In November, Ottawa announced it would largely eliminate reporting obligations for Canadians stemming from the Underused Housing Tax.
With a report from Chen Wang
Erica Alini