The Mistake: The Federal Government’s Bare Trust Reporting Rules

Written by Jonathan Wright.

Now we have bare trust returns, and I don’t get it.

For context, bare trusts are a form of agency relationship: I agree to hold X (real estate say, or a bank account) on your behalf. At the land title office or the bank my name will be on title, but I don’t actually own the property; you do.

The underlying policy for reporting of these trusts is to reveal that which is hidden. To expose wrongdoers to just taxation! Great. But there are so many reasons why this initiative is completely misguided.

First, many of these arrangements are already reported. In BC we have transparency legislation for bare trusts for real estate and shares of corporations. So too for federal corporations. Most that is hidden is already revealed.

Second, if a taxpayer is hiding their income, the only way to catch them through bare trust reporting is the taxpayer’s stupidity. Somehow they slip up and report what they are failing to on their returns. Will this work? I will reluctantly concede that there are stupid Canadians, but if the stupid Canadian is a tax dodger, they will likely apply what exists of their marginal intelligence to how they choose to file for bare trusts (i.e. not).

Which brings me to my third point. It’s the good guys who bear the brunt of this. I have countless clients now required to file bare trust returns, all of them completely innocent. Many of these trusts have no income tax component whatsoever. These blameless clients are now paying hundreds of dollars to their accountants to file bare trust returns for which even the accountants will readily admit that there is no value add. Hundreds of dollars every year to prove that there’s nothing to see.

So what else could they have done? If Finance is dead set on having this information reported, I suggest that the bare trustee could report it on their own return. Apart from certain non-residents, nearly every entity which is a bare trustee will already be required to file a tax return. So instead of forcing a separate return, add a couple of extra questions to ones which already exist. Are you a bare trustee? For what asset? For whom? It’s a simple addition that can be followed up on by the CRA where necessary.

Practitioners I speak to talk about enormous wait times from the CRA. My own clients have experienced this on multiple occasions. As just one example, when I began doing voluntary disclosures just over a decade ago (fairly recently!) wait times for a finalized disclosure were regularly within 6 months from initiation. Now I advise clients that three years is more likely.

The CRA is completely overwhelmed. So too are taxpayers, especially small businesses. And with each passing year, Finance adds to their plate. They can lighten the load just a little by getting rid of this needless new requirement.

Rant over.

If you want to talk more tax, I can be contacted directly at jonathan@rkwlaw.ca or 604.425.1123. Thanks for reading.