A key lesson learned from the bare trust tax reporting debacle

Now that the dust has settled on bare trust exemptions from new tax reporting rules for 2023, how can the Department of Finance achieve its policy objectives of combating international crime without casting a net so broad that it scoops up ordinary Canadians’ joint bank accounts and other innocuous financial arrangements? 

The new reporting rules for trusts were created as a response to international calls for governments to ensure they have adequate, accurate and up-to-date information on the beneficial ownership and control of corporations and legal arrangements such as trusts, also known as “transparency” for these entities.  

Multilateral organizations like the Financial Action Task Force (FATF) are concerned that criminals are using vehicles such as corporations and trusts to conceal illegal activities that include money laundering, terrorist financing and weapons proliferation. In a peer review by the FATF, Canada was rated partially compliant for corporate transparency and non-compliant for transparency for legal arrangements.  

To improve corporate transparency, Canada now requires federally incorporated companies to disclose and update information maintained on a central register to identify individuals with significant control of the company. The central register can be accessed through the Corporations Canada website hosted by Innovation, Science and Economic Development Canada.  

This system for corporations is straightforward and not too cumbersome. But to create transparency for legal arrangements, the federal government has chosen the path of most resistance—the tax system. The federal budget for 2018 proposed that certain trusts would be required to provide information annually, including the identity of settlors, trustees and beneficiaries. Legislation passed in 2022 greatly expanded the type of trusts required to file this annual return. Trustees of “bare trusts” are now supposed to file an annual tax return unless they are exempted.  

Bare trust arrangements are common and usually innocuous. For example, a parent might open an “in trust for” account for a child or co-sign a mortgage. As a result of public criticism, the Canada Revenue Agency (CRA) announced just days before the filing deadline in April 2024 that a tax return would not be required for bare trusts for 2023 unless the CRA requests one. 

Neither the CRA nor the Department of Finance have signalled how they plan to collect information about bare trusts going forward. The CRA stated that it would work with the Department of Finance to further clarify its guidance on this filing requirement. 

To avoid more trouble and expense for both taxpayers and the tax authorities, the government could consider creating a registry for trust arrangements outside of the tax system, with sensible exclusions for low-risk trusts. Trustees (or other controlling persons) would be required to register the trust with a registrar and file an annual return to indicate whether any information has changed. The FATF suggests that countries should maintain one or more registers to collect information on trusts, “considering, risk, context and materiality”. 

Many countries have opted to maintain a central registrar of trust relationships. The European Union requires that member states maintain a central register to hold beneficial ownership information for certain trusts. The Australian government has proposed a central register and a phased approach to implementation that would eventually include beneficial ownership information on trusts.  

Using the tax system to achieve transparency for trusts has already proven difficult and inefficient, to say the least. By using a registry system, the government could narrow its net to gather the information it needs to discourage improper uses of Canada’s financial system instead of widening its net to collect an overwhelming amount of information about ordinary Canadians’ finances that doesn’t help achieve that goal.