One Comment About Taxation – The Canadian “Bare Trust” Reporting Debacle – It’s About RESPECT

 

One of my favorite vocalists of all time is the Queen of Soul, Aretha Franklin.  I particularly loved her soulful style which was on great display during one of her greatest anthems, RESPECT.  The way she spelled out the words of “respect” during the song was classic.

That song instantly came to mind last week when the Canada Revenue Agency, on March 28, 2024, released a news release that bare trusts would now be exempt from the new trust reporting requirements that have been much lamented.  While that announcement was certainly welcome, it came 5 days before the filing deadline for trusts.

In the meantime, tax professionals and trust taxpayers have been struggling mightily with the new trust reporting requirements (that requires significant and invasive disclosures of trust beneficiaries, settlors and trustees).  These “new” rules were first proposed in the 2018 federal budget to come into effect for the 2021 taxation year but were delayed twice and thus the 2023 taxation year is the first time the new reporting requirements are law.

However, in 2022, the Department of Finance added in a surprise reporting requirement to the draft legislation that “bare trusts” (a type of trust that is akin to an agency relationship and is ignored for all purposes of the Income Tax Act) also need to be reported.  There are literally hundreds of thousands of bare trust relationships that are in existence in Canada with most of them being very benign.  The Department of Finance was presented with significant feedback as to why bare trusts should be exempt from the pending reporting requirements.  However, such feedback was simply ignored.

The CRA was tasked with administering the new reporting rules and they, along with the tax practitioner community, struggled mightily to determine whether a legal relationship was a trust and / or a bare trust that needed to be reported.  As an example, my colleague – Jay Goodis of Tax Templates Inc. – and myself put on a webinar through our organization – Canadian Tax Matters – on the new trust reporting rules which over 500 tax professionals attended. We answered literally hundreds of questions during and after the session about the application of the new rules.  The questions were very difficult to answer.

Now, 5 days before the filing deadline, the CRA has announced that bare trusts will be exempt from filing.  This after practitioners have wasted a ton – and I mean a ton – of time on determining whether a legal relationship needs to be reported.  Such time translates into significant professional fees being generated to trust taxpayers.  While some cynics might say “well, tax professionals are benefiting from these rules with the increased fees”, I’ll just say such a comment is not worth even responding to.  Virtually all good tax professionals that I know do not relish the extra fees and time in an already time-crunched period where there is more work than they can already handle with a huge shortage of accountants.  Especially when it is doubtful what such reporting will yield and benefit Canada as a whole.

If the above story sounds familiar, it is.  The Underused Housing Tax debacle should come to mind.  Overly simplified, Canadians are exempt from this new tax.  However, if you own property through a Canadian trust, partnership or corporation, you still had to file a return in order to claim the exemption!  If you did not, you risked significant penalties.  For the 2022 taxation year, the necessary filings were due April 30, 2023.  Shortly before that deadline, the CRA announced an extension to October 31, 2023.  On the afternoon of October 31, 2023, the CRA announced a second extension of the filing deadline to April 30, 2024.

Such late announcements are, again, welcome.  However, let’s be serious.  By then, most of the work and effort has already been done.  A ton of time and effort has been expended – and thus wasted – if such filings are not required or due on that date.  Do professionals want the filings to be required?  Of course not.  What they want is simple respect.  This train wreck was easily predictable and such predictions came true.  Instead of disrespecting Canadian taxpayers and their advisors by outright dismissing early feedback, such feedback could have and should have been better listened to before implementation.

Over the last two months, impacted professionals have lost sleep, worked nights and weekends only to be told hours before the deadline they’re changing the rules.  Contrast that with the fact that the CRA’s headcount has doubled in the last 4 years, significant budget increases at the CRA, the high percentage of questions CRA gets wrong when taxpayers call, the long wait times to get through, the long timelines for assessments (but when the CRA finally gets around to working on a taxpayers matter sometimes years later, there are short timelines, often 30 days, to give the information they need).

It is well known that Canada has a serious productivity challenge. Even the Bank of Canada’s leadership recently commented on this by saying it’s time to “break the glass” and deal with those problems (more on this topic below).   Examples of the UHT and trust reporting debacles certainly contribute to those challenges when you have taxpayers and their advisors scrambling for months only to be told at the last minute to the effect of “we’re just kidding”.  That is simply not respectful.

Houston, we have a problem. And it starts with RESPECT. It’s time for the Department of Finance and the CRA to bring back some RESPECT to how hard tax professionals have and are working for the benefit of Canada.  When they have legitimate feedback, there needs to be legitimate listening. The communication lines are obviously broken.  In addition, it’s time for the Department of Finance and the CRA to take a long hard look in the mirror and realize that they are contributing significantly to Canada’s productivity challenges with debacles like this.

And let’s be clear for those who commented on my Financial Post article of the same topic and stated that I am solely blaming the CRA for this debacle.  Despite the Financial Post headline, I am not.  I am simply frustrated with the overall legislative process.  As discussed more below, it needs improvement.

I’ll keep beating the drum…it’s time for serious tax reform and review.  It’s necessary to deal with Canada’s productivity challenges and to bring back some simple respect to Canadian taxpayers.

In addition, debacles like the UHT, trust reporting and the 2017 private corporation tax proposals, shine a strong light on the fact that it’s time for a serious discussion on how tax policy is developed in Canada.  Having such policy development under the sole purview of the Department of Finance should be up for review.  In my view, it should be a much more open and transparent process than the secretive and closed process (with only limited engagement of stakeholders when it is deemed necessary) that currently exists. At a minimum, the communication lines between the Department of Finance, the CRA and stakeholders needs significant improvement.

Aretha, it’s time for you to belt out your anthem.  Department of Finance and CRA…it’s time for you to listen. And to RESPECT.

 

One Comment About Leadership – Good Leadership Doesn’t Happen By Accident

 

In my view, being a good leader does not just happen.  While some may have more natural abilities – including confidence – to be a good leader, in my view it takes practice.

It takes practice to be resilient.  To exercise confidence and decisiveness in making decisions.  To be self-aware.  To be empathetic.  To buck trendiness when it needs to be.  To be patient.  To think critically.  To be transparent. To be respectful to feedback and in some cases constant criticism.  To be optimistic but not naïve. To have a growth mindset.  To be courageous to make the hard decisions.  To listen.  To be accountable.  To be innovative.  I could go on and on….

Too often, the people that are chosen as “leaders” – or think they are leaders – are often the ones who are “smart” and very good at their craft.  Unfortunately, many of those people lack basic leadership skills and some are “jerks”.  I’ve written about this before in this newsletter.

I believe that people who value leadership or who want to climb the ladder of leadership need to learn basic leadership attributes and practice it.  It takes significant time and investment including a ton of self-reflection on how to be a good leader.  Included in that self-reflection is being brutally honest.  Are you too a “jerk”?  If so, how can you improve?

Two approaches that have worked for me (and I’m not saying that I have triumphed over the study of leadership since I’m continuously learning) is continuous learning and peer-to-peer learning.  I’m intellectually curious and love to learn more about my craft (taxation) and many other topics that I know little about (like art and food history, world history and non-Canadian political science for example, although I enjoy learning more about all of that) and gobble up many different topics that fascinate me.  My approach is that my brain is only so large and has limited capacity but the more I can learn, the more I can serve the people I lead.

Peer-to-peer learning is another way that has helped me tremendously. I have been part of a peer-to-peer learning group for over 25 years and now I’m a Chair and Alberta Regional Director for MacKay CEO Forums where I lead a peer group (soon to be two groups) and help grow the footprint for MacKay in Alberta.  The learnings I get from hanging out with like-minded and experienced peers is truly amazing and eye-opening. (Feel free to reach out to me directly if you’d like to learn more about being part of the amazing MacKay CEO Forums groups).

Leaders, be intentional about being a leader.  It will only help you and the people you serve.

 

One Comment About Economics: “Time to Break the Glass: Fixing Canada’s Productivity Problem”

 

Last week, Carolyn Rogers – Senior Deputy Governor of The Bank of Canada – spoke at a conference in Halifax, NS.  Her remarks about Canada’s productivity were stunning in their bluntness.  Some highlights:

Productivity is a way to inoculate the economy against inflation. An economy with low productivity can grow only so quickly before inflation sets in. But an economy with strong productivity can have faster growth, more jobs and higher wages with less risk of inflation. That’s why I want to talk about Canada’s long-standing, poor record on productivity and show you just how big the problem is. You’ve seen those signs that say, “In emergency, break glass.” Well, it’s time to break the glass.

Canada’s labour productivity eked out a small gain at the end of last year, according to Statistics Canada. But that came after six straight quarters where productivity fell. Of course, the pandemic was a major disruptor for the economy. During the pandemic, the resourcefulness and ingenuity of Canadian business leaders was put to full use. Companies adjusted their business models and ways of working. Given how nimble companies were, we thought productivity would improve coming out of the pandemic as firms found their footing and workers trained back up. We’ve seen that happen in the US economy, but it hasn’t happened here. In fact, the level of productivity in Canada’s business sector is more or less unchanged from where it was seven years ago.

People have been sounding the alarm, but it can be hard to feel a sense of urgency about an abstract concept like productivity. Most people, when they hear that we need to improve productivity, think they’re being told they have to work harder or work longer hours to produce more, or maybe take less time off.

That’s not the case. Labour productivity measures how much an economy produces per hour of work. Increasing productivity means finding ways for people to create more value during the time they’re at work. This is a goal to aim for, not something to fear. When a company increases productivity, that means more revenue, which allows the company to pay higher wages to its workers without having to raise prices. Ultimately, higher productivity helps the economy generate more wealth for everyone. The bottom line is that the benefits from raising productivity are there no matter what your role is: for workers, for businesses and, yes, for central bankers, too. I’ll come back to this point later.

…

 Higher productivity should be everyone’s goal because it’s how we build a better economy for everyone. When a business gives workers better tools and better training, those workers can produce more. That, in turn, means more revenue for the business, which allows it to absorb rising costs, including higher wages, without having to raise prices. For our part, central bankers look at the economy as a whole, not at individual companies. And when the entire economy becomes more productive, that means the country can have more growth before we see upward pressure on inflation. We can have more jobs. We can have higher wages.

The guts of the speech also included the Bank’s comments on how to improve which included:

1.     The need for skills development in the labor composition of our country’s workforce;

2.     Removing disincentives to growth;

3.     The need for more business competition; and

4.     The need for businesses to invest in machinery, equipment and in particular, intellectual property.

The speech should be a wake-up call for many in business.  It’s worth a read and I’d encourage you to do so.

 

Bonus Comment – Quote From John F. Kennedy – 35th President of the United States – About Learning and Leadership

 

“Leadership and learning are indispensable to each other.”

 

Yep, totally agree!  Leaders, what are you doing to be a better leader?

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