Seniors and their families caught up in botched CRA attempt to crack down on tax evasion

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The inept launch of new tax-filing rules by the Canada Revenue Agency started with good intentions.

The CRA wants to reduce tax evasion and money laundering. As part of this effort, it’s asking taxpayers this year, for the first time, to provide information on a variety of assets where one person is a beneficiary and another is a trustee who manages things. This could include people who are joint holders of bank or investment accounts with their parents, and were added to help run the accounts.

Arrangements such as these are called bare trusts. To disclose one to the CRA, you must file a Trust Income Tax and Information Return and a T3 Schedule 15. Good luck with that.

My colleague Erica Alini recently looked at the complexities faced by people who attempt to file these forms on their own, and the difficulties of finding an accountant. One piece of good news to add here is that H&R Block says it has people who can file T3s for clients. The cost starts at $150.

An important thing to note about bare trust reporting is that there should not be any tax owing as a result. The purpose of this exercise is to gather information only. “It’s disclosure,” said Pam Prior, a tax partner at KPMG in Vancouver.

Ideally, the CRA would have assembled a plain-language information package for Canadians about the new measures, to explain who is affected and how to proceed in providing the requested details. A simplified T3 for bare trusts would also have been a nice touch.

What we have instead is a five-page T3 return suitable for all the various kinds of trusts, a term used to describe arrangements where assets are managed by a trustee to benefit one or more beneficiaries.

Ms. Prior points out that there is a CRA guide to filling out the T3, but it’s quite technical. On page 29 of this 86-page PDF document, available for download on the CRA website, there are instructions for filing information on bare trusts. Step 1 is to select “code 307,” while Step 2 is to send a copy of something called the “trust document,” if this is the first year of reporting to the CRA. Insert eyerolls here, because bare trusts often have no paper documentation.

In CRA-land, bare trusts are part of a constellation of trusts that broadly includes testamentary trusts, inter vivos trusts and public trusts. But for taxpayers, it has been a shock to find out that arrangements made to help families manage their finances must now be disclosed to the CRA.

A few basics to help people who think they may be part of a bare trust:

• It’s the trustee who must file the T3. This is the person who administers a joint bank or investment account – someone managing an account for a parent, for example. Ms. Prior said the settlor, a term for the person who contributed the assets to the trust, does not have to file. With a joint bank or investment account, the parent could be the settlor and the beneficiary.
• There may be an exemption to the filing requirement, for trusts with certain assets of $50,000 or less. Ms. Prior said the exemptions apply in cases where a bare trust has a bank account or an investment account with publicly traded stocks or mutual funds, but there could be exceptions. Example: dividend-paying stocks.
• There are penalties for non-compliance: $25 for each day you’re late in filing, with a minimum of $100 and a maximum of $2,500. Extra penalties may apply if you knowingly fail to file a trust return or make a false statement.
• The deadline for filing a T3 is April 2 this year, but the CRA has said it will not assess penalties for bare trust filings after that date.
• You’re expected to file a T3 annually, including a Schedule 15, and report changes from the previous year’s filing.

Ms. Prior said the new bare trust filing requirements could also affect parents who were put on the title of a home with their kids to help them secure a mortgage, and adults who have opened informal trust accounts to invest on a minor child’s behalf.

It’s difficult to be precise about who is affected, because the CRA has failed to provide enough guidance. It’s striking how even experts in the field of tax and trusts are qualifying or hedging their advice.

Here’s some advice for the CRA: Delay the requirement to file a T3 for a bare trust by one year and use the time to create a simplified bare trust filing system anyone can use. It’s outrageous to force people to pay for the services of an accountant or tax preparer to disclose routine family business to the CRA.

Meantime, Ms. Prior has a thought for people who are unsure of whether to file a T3 for what could be a bare trust: “I would say, if in doubt, file.”

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