A months-long investigation by the Office of the Taxpayers’ Ombudsperson into the rollout of new filing requirements for bare trusts last year found issues with both the complexity of the tax measures and how the Canada Revenue Agency administered them.
In a report titled “Unintended Consequences,” François Boileau, the ombudsperson, this week released the results of a systemic examination of the CRA’s conduct. His office launched the investigation after the agency suspended the tax-filing rules for bare trusts last spring – on the last business day before the cut-off date for submitting those returns.
The main issue with the onerous reporting requirements, which stumped even accountants and tax lawyers, was the complexity of the legislation the CRA had to administer, Mr. Boileau’s office said. But the investigation also found the agency itself fell short on several fronts, particularly by waiting far too long to pause the bare trust rules.
The agency struggled to administer the information-sharing obligations that went into effect in the 2024 tax season. Those changes stemmed from a 2022 law designed by the Department of Finance that was meant to make it harder to hide income or dirty money using a trust. The rules also for the first time expanded the requirement to file annual returns to bare trusts, in which trustees can only act at the instruction of the beneficiaries.
The problem, as tax professionals quickly pointed out, was that many informal, undocumented arrangements might constitute a bare trust under common law. For example, Canadians who hold title to their adult children’s homes because they co-signed their mortgages and people who have joint accounts with their elderly parents might be deemed to have bare trusts.
Canadians who’d never intentionally created a trust learned they might have to start filing annual trust returns or risk steep penalties. But merely figuring out whether a certain arrangement is, in fact, a trust can require extensive fact-gathering and complex legal interpretations. Canadians found themselves spending hundreds, if not thousands, of dollars in accounting and legal fees to understand whether they had to submit paperwork and for help filling out the forms.
The CRA eventually suspended the reporting requirements for bare trusts on March 28, just days before the April 2 deadline to submit trust returns for the 2023 tax year.
The Office of the Taxpayers’ Ombudsperson called the law underpinning the bare trust rules “burdensome.”
“The CRA is only one piece of the puzzle, as its role is only the administration and enforcement of the new trust reporting legislation and not creating legislation, which is the role of Finance Canada,” the report said.
But the investigation also pointed to significant shortcomings in how the CRA handled what was entirely under its purview.
For example, the agency waited six months after the new trust reporting rules had become law to discuss them with tax preparers and others affected by it.
And while it couldn’t give legal advice to individual taxpayers on whether they had a bare trust, it often missed the mark even in providing general information, the report said.
For instance, the CRA featured on its website a hypothetical scenario involving a property developer to illustrate a common arrangement that might constitute a bare trust. But “many affected taxpayers are not property developers,” the report noted.
And the agency’s awareness campaign on social media consisted of fewer than 10 posts on each of X, Facebook and LinkedIn about trust filing, without any warnings directed at people unaware that they might be in a trust relationship, the investigation found.
But the report took particular issue with the CRA’s decision to wait until the end of March before largely exempting bare trusts from filing. By then, tax preparers and their clients had likely already spent almost $1-billion trying to comply with the rules, according to a survey of Canadian accounting firms conducted shortly after the requirements were scrapped.
(The CRA also announced in late October that bare trusts will be exempt from filing for the 2024 tax year.)
The office of the ombudsperson made several recommendations to the CRA, including reviewing how it works with the Finance Department on legislative tax proposals and introducing a simplified trust return for bare trusts.
CRA spokesperson Charles Drouin said the agency welcomes the report and is already at work to address its recommendations. Finance spokesperson Benoit Mayrand noted that the department launched a consultation in August on amendments to clarify the bare trust reporting requirements and reduce the number of Canadians who would be required to file.
Still, the investigation did not shed much light on the consultations between the CRA and the Finance Department before the bare trust rules became law. The office of the ombudsperson couldn’t access information on those discussions because they are cabinet confidences, it said.
Joseph Devaney, a director at the financial education platform Video Tax News, said public insight into what went wrong with the design of the legislation is critical.
While he praised the report, he said it also highlighted the need for the office of the ombudsperson to be granted powers to dig deeper.
Mishaps related to new tax laws are becoming increasingly common, with Ottawa recently imposing and then walking back new measures on capital gains and foreign-owned underused housing, for example, he noted.
“That just leaves whole populations swimming in uncertainty,” Mr. Devaney said.
