Tax practitioners are bracing for a repeat of the chaotic bare trust reporting debacle as the next filing season looms less than nine months away. Kim Moody, a tax expert, warns that the government's expanded trust reporting rules, which swept in bare trusts in 2022, remain deeply problematic.
The Groundhog Day of Tax Filing
Moody likens the situation to the movie Groundhog Day, where Bill Murray relives the same day repeatedly. He notes that many practitioners fear they will face the same confusion and frustration as in 2023, when the rules were first applied to bare trusts.
The trouble, Moody explains, is not complexity itself but complexity imposed on a broad and unsuspecting audience. Bare trusts include ordinary arrangements such as a parent on a child's home title to help with a mortgage, an adult child added to an elderly parent's bank account, or a nominee corporation used to acquire property for different beneficiaries. None of these are typically mischievous for tax purposes.
The Origin of the Reporting Rules
The government first proposed expanded trust reporting in the 2018 federal budget, with an initial application date of 2021. A global push for trust transparency was underway, and Canada was considered behind. Due to COVID-19, implementation was delayed until 2022. However, bare trusts were added to the regime by a 2022 amendment, despite warnings from the Joint Committee on Taxation and other organizations. The rules were then delayed again to the 2023 taxation year and passed into law.
The Foundational Problem: Who Must File?
A core issue is determining who needs to file. Determining whether a legal relationship is a trust is typically the domain of lawyers or very experienced accountants, trained to distinguish between trusts, partnerships, agency, joint tenancy, co-ownership, and joint ventures. The differences are subtle but have significant tax implications. Yet the duty to file returns often falls on tax preparers who are not lawyers.
The 2023 Fiasco
The first reporting period for 2023 was a disaster. Taxpayers and advisers struggled after waking up to how difficult the rules were to apply. The Canada Revenue Agency (CRA) devoted resources to help, but it was too little, too late. As a result, more than 44,000 Canadians filed returns for bare trusts in early 2024, many after paying advisers, only for the CRA to cancel the requirement days before the deadline. The government was heavily criticized for this wasted effort.
Looking Ahead to 2026
With the next filing season approaching, Moody warns that the same issues remain unresolved. He states, "Once again, tax practitioners will be asked to answer legal questions they were never trained to answer." The CRA has not indicated any major changes to the rules, leaving taxpayers and their advisers to navigate the same murky waters.
The broader context is a global push for trust transparency, but Moody argues that Canada's approach has been poorly implemented, imposing burdens on ordinary Canadians without clear guidance. He calls for the government to either simplify the rules or provide clearer direction to prevent another debacle.
