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Ottawa’s latest proposed rule changes for bare trusts would significantly reduce the number of average Canadians who would have to file special tax returns for trusts every year, tax experts say.
But many people will still need professional guidance to make sure they qualify for the new tax-filing exemptions, some accountants warn.
The federal government broadened tax-filing requirements for trusts in 2022 in order to collect more information about who truly owns property in Canada, part of an effort to curb money laundering and tax dodging.
But the measures were lambasted by accountants for creating what critics called an onerous and costly bureaucratic exercise for scores of Canadians with ordinary, informal family arrangements that can be deemed bare trusts, a type of trust that was previously exempted from filing.
The Canada Revenue Agency largely suspended reporting requirements for bare trusts for the 2023 and then the 2024 tax year. Meanwhile, the Department of Finance has been working on changes to narrow the scope of the rules. It released its latest version of proposed amendments late last month.
The suggested changes would drop the annual filing requirement for many smaller trusts, as well as for a host of everyday scenarios that may be considered trusts. But certain aspects of the law will still force many Canadians in common situations to seek professional tax advice, said Hugh Neilson, director of taxation services at Kingston Ross Pasnak LLP.
In a bare trust, the trustee can only act on the instruction of the beneficiary. Among the ordinary Canadians affected by the initial filing requirements for bare trusts were parents who had added their names on the title of the home of an adult child to help them qualify for mortgage and individuals who had put their names on the title of their elderly parents’ homes to simplify the eventual transfer of the property.
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People who had added their names on elderly relatives’ financial accounts to help them with everyday money management were also told they might have to file.
According to the latest draft amendments, trusts that exist for less than three months in a given year or hold no more than $50,000 worth of property would not have to file an annual return.
Trusts worth up to $250,000 would also be exempt if trustees and beneficiaries are related, and the trust holds a limited list of assets including personal-use property, securities traded on a designated exchange, mutual funds and Guaranteed Investment Certificates.
Those carve-outs would significantly reduce the range of common circumstances that would trigger an obligation to file, said Mr. Neilson.
Other exemptions, though, come with potentially hard-to-interpret nuances. For example, no filing would be required for a trust holding real estate where all legal owners are related and the property could be designated as a legal owner’s principal residence.
This exclusion would encompass situations in which parents have added their name to the title of their adult children’s homes and vice versa. However, scenarios in which the relatives who inhabit the home are not on title would generally require an annual tax return, Mr. Neilson said.
A particularly complex case: The parents are on title for an adult child’s home, but the child is not on title. Parents can designate a property they own and that is inhabited by their children as a principal residence. However, parents who have no beneficial interest in the home might not be able to avail themselves of this type of principal residence designation, Mr. Neilson said.
Anna Malazhavaya, a tax lawyer and founder of Advotax Law Professional Corp., said such a scenario would likely be considered a trust that must file annually under the new rules.
Some tax experts are also raising concerns about Ottawa’s timeline for implementing the changes. The draft amendments have yet to be finalized and introduced in Parliament. Assuming they become law some time this fall, that would leave only a short time for the CRA to issue guidance and raise awareness of the new rules before the start of the tax season.
“I would hope CRA would take an ‘education first’ approach before giving out all kinds of penalties,” said Ryan Minor, director of taxation at Chartered Professional Accountants of Canada.
It is also unclear whether the tax agency will issue a simplified tax return for bare trusts, as recommended by the Office of the Taxpayers’ Ombudsperson, Mr. Minor said.
