One Comment About Taxation – Canada’s Pervasive Drive Towards Tax “Transparency” – Including the “New” Trust Reporting Rules

  

Around the world, countries have been racing to introduce transparency requirements in many different areas of the law.  Examples include corporate shareholder registries, required disclosure of the implementation of certain tax transactions and trust beneficiary reporting requirements.

Canada is not immune from this trend.  In recent years, Canada has expanded some of its existing laws by increasing the amount of information that is required to be disclosed on existing forms (like the ownership of certain foreign property under forms T1135 and T1134).  It has also introduced a new federal corporate ownership registry (other provinces like Ontario and British Columbia, for example, have also followed suit), mandatory disclosure of certain tax transactions, the debacle that is the Underused Housing Tax and the “new” trust reporting rules. All of the new rules are accompanied by significant penalties for non-compliance.

When new reporting rules are introduced as proposed law, the Canadian government states the usual rhetoric that these rules are being introduced to comply with “international best practices”, reduce money laundering, assist with the enforcement of proper tax compliance, etc.  But do these types of rules actually do that?  Or do they encourage even more non-compliance?

One can debate the pros and cons of these types of new rules forever and time will tell if they are actually effective in achieving their objectives.  Put me on record as stating that the “bad guys” will never comply with such requirements and, accordingly, will fail miserably at achieving their objectives.

In the meantime, such massive new reporting requirements are pushed to the average tax-compliant taxpayer who wants to comply with the law.  Unfortunately, the amount of required disclosure to comply is often voluminous and may not be available. To comply properly, there may be a significant increase in professional fees.  All for what?  To make the Canada Revenue Agency’s (or other government administrators) job’s easier to review or audit?  Perhaps.

It should be obvious to the casual observer as to the overall benefits to a country for proper adherence of laws.  But there is a tricky balance between proper compliance and placing reporting burdens on taxpayers.  At some point, the scale tips in favour of wasting valuable resources for little or no positive outcomes. In other words, at some point the amount of energy and resources expended into ensuring one is compliant results in little or no overall societal benefit.

For those that might think expanded or new reporting rules are a boon to the accounting / tax profession (more fees!), think again.  There are not many accountants / tax preparers who relish these new rules. They are already over-worked given the huge shortage of accountants and demands on their time.

The new trust reporting rules, for example, are very burdensome.  After determining if the new rules apply to a trust, it requires separate disclosure of a whole bevy of information such as who the beneficiaries are (alive or unborn), the person(s) that created the trust and identification of persons that control the trust including all such persons’ tax identification numbers.  The new rules also apply to “bare trusts” (a type of trust arrangement under which the trustee of the trust can reasonably be considered to act as agent for all of the beneficiaries under the trust with respect to all dealings with all of the trust’s property).

Bare trusts are commonly used in many routine types of transactions (such as real estate purchase and disposition transactions). Simple and routine scenarios such as co-signing for a child’s mortgage or including yourself on your aging parents bank accounts may create a “bare trust” and create a filing obligation under the new rules.

There are likely hundreds of thousands of these types of arrangements in existence with many new ones created daily. It is rare to achieve tax mischief with the use of such arrangements since the beneficiaries are ultimately responsible for any tax reportings and consequences.  However, as mentioned, the existence of these types of arrangements are now required to be reported under the new rules.  Why?  Good question.

Given the above requirements, there are no shortage of questions as to how Canadian taxpayers and their accountants will be able to properly comply with the new trust reporting rules.  If they do not, the penalties can be severe with the most severe penalties reserved for those who do not file under circumstances amounting to gross negligence – the greater of $2,500 and 5% of the highest amount of the fair market value of the trust property held during the year.  Ouch!  Accordingly, for those planning not to file or to loosely adhere to the rules, beware!

Consider the situation of co-signing a mortgage for your child on a $500,000 home – likely a bare trust arrangement – only to learn years later that there are penalties of $25,000 per year plus interest? Is this what the rules intended and is that fair for the average Canadian without access to tax experts?

The first year of these new trust reporting requirements have many Canadian taxpayers and their advisors concerned.  While there has been approximately 5 years to get ready for these rules, the amount of information required to properly file and avoid penalties can be daunting.  For interested persons, Canadian Tax Matters (an organization that I am a part owner of) is instructing a webinar on the new trust reporting rules for later this month – registration link here.

Overall, again, I question the flurry of new “transparency” requirements.  While some will obviously cheer on these new rules (“the more information provided to the government the better!”), I think the more balanced approach is to have reasonable and required disclosure of matters (with appropriate and not crushing penalties for non-compliance) and not overburden the average compliant Canadian with unnecessary information since the “bad guys” will never comply with these requirements.

The balance needs to be restored.

 

One Comment About Leadership – Virtual vs In-Person Meetings

 

During COVID, the proliferation of virtual meetings using Zoom, Teams, FaceTime and other platforms “Zoomed”.  It replaced the need for in-person meetings since many felt they couldn’t leave their homes to go have in-person meetings.  Over time, people became used to the “convenience” of having such meetings…they didn’t need to leave their homes or offices, could roll out of bed and have a “meeting”, could prepare 5 minutes before the meeting rather than well in advance, etc.

Since that time, many have glorified the use of such platforms as forever changing the way we do work.  For example, a few years ago, an organization that built its whole business on establishing meaningful in-person relationships glorified the use of virtual with a terrible marketing slogan “Zooming into 2021!”.  I still cringe when I think about that.

Are virtual meetings a great way to establish a meaningful relationship?  No.  For those of you who know me, you’ll know I have strong opinions about this topic.  In my view, while convenient and desirable in some cases (like replacing a telephone call if the geographic distance between the two parties is very far), the virtual platform simply cannot replace the benefits of in-person meetings.

Human beings are social creatures, and it is that social nature that has helped them advance to the top of the food chain over history.  For example, some anthropologists posit that it is the fact that human beings have the ability to tell stories that has enabled them to congregate logically and advance our overall well-being.  Story telling includes the obvious, like speaking, but it also includes hand gestures, body movements, facial expressions and in some cases physical touch (like handshakes, a pat on the back, etc) in order to get the story told.

“Stories” are not just simple fairy tales or a recitation of a historical matter.  They can include a description of a problem, an idea, significant current challenges, etc.  All things that business owners / professionals help out with and who have their own stories.  Can virtual platforms help to listen to and tell stories?  In my view very limited.

Here are some of my pet peeves with virtual platforms or people who glorify the use of such platforms:

• The sheer laziness of not wanting to try to establish in-person and meaningful relationships and instead strictly or routinely rely on virtual platforms for engagement;
• People who don’t “show-up” with the best version of themselves on display. Virtual platforms, for some reason, has given people the license to show up in pajamas, t-shirts, and in many cases shorts or some other lazy bottoms;
• Their cameras are often turned off. This drives me crazy…and begs the question as to whether or not the person is even engaged.  The vast majority of the time my conclusion is no; and
• People who eat their lunch or other meal in front of the audience…I’m not interested in seeing you eat unless we are together enjoying a nice conversation over an in-person meal and engaging in a real relationship.

I often hear:

-“I’m much more productive using virtual than meetings!”

– “I don’t have to waste all that time driving to a meeting and pay for parking!”

– “Come on Kim.  Don’t be so old-school.  Times have changed.”

And I get it.  But what I hear when you say stuff like the above, is that you value productivity and cost savings more than establishing a meaningful relationship with me.  And if that’s the case, that’s your choice.  Don’t get me wrong…I love productivity, efficiency and cost-savings. But I value meaningful relationships more.

My choice is to:

• Refuse all virtual meetings in favor of an in-person meeting (unless a telephone call would have been the norm prior to the proliferation of virtual meetings);
• Refuse all virtual “coffees”… something I find silly and borderline offensive (unless, again, a telephone call would have been the norm prior to the proliferation of virtual); and
• Refuse to attend or speak at any virtual conference or webcast that could have easily been done in-person. There are exceptions to this (again often dealing with geographic location issues) but as a general rule I will refuse to attend or speak at such functions unless I’m being paid a lot of money! 😂

My choices above are rooted in a strong belief that virtual meetings are not conducive to establishing meaningful long-term relationships.  I refuse to engage in laziness.  I want to show up with the best version of myself every day.  I want to dress well for my audience.  And I certainly want to create meaningful relationships with the people I serve including family, friends, clients, centres of influence and colleagues.

Leaders, do you have intentionality around this topic?

 

One Comment About Economics and Politics: Growth of Canada’s Immigrant Income

 

A recent report released by Canada’s Parliamentary Budget Officer revealed some interesting statistics and commentary regarding the income trends of Canada’s immigrants from 2014 -2018.  Some of the relevant comments from the Executive Summary is below:

…the focus of this report is on how the median income of newly arrived immigrants has changed compared to those of all Canadian tax-filers and some underlying facets of that change. The data suggest that the trend began before the important policy changes of 2015 – the introduction of the Express Entry system.

More precisely, between 2014 and 2018, the median total income of newly arrived immigrants (1 year after acquiring permanent residency, referred to in the report as “landing”) went from 55 per cent of the median total income of all tax-filers, to 78 per cent. This implies that the total income of new immigrants rose significantly faster than did the total income of all tax-filers.

The gain in relative median income also occurred disproportionately in a few broad occupational categories. Those in professional occupations (e.g., engineers, applied scientists, teachers, accountants, physicians, etc.) were responsible for much of the narrowed gap, in terms of their incomes one year after landing.

Additionally, we found that the Canadian experience of immigrants just before landing was an important correlate. An increasing number of immigrants are working in Canada on a temporary basis, and then gain permanent status. Their median total Canadian income in the year before landing has been increasing since 2007: it went from about 49 per cent of all residents in 2006, to about 89 per cent in 2013.

A related finding is that the increase in income occurred while the number of immigrants with family ties in Canada was increasing – suggesting that pre-existing social networks are important for economic outcomes. Consistent with that latter observation is that there was a regional component to the increased income. Residents of Ontario and British Columbia contributed the most to narrowing the income gap, and those are areas with large in-situ communities from the source countries.

The federal government announced substantial increases in its planned immigration targets, reaching 500 thousand people for the years 2025 and 2026 as announced by Immigration, Refugees and Citizenship Canada (IRCC 2022, 2023).

It is expected that it will boost the Canadian economy over the long term by expanding the labour supply. Whether that translates into a benefit for the existing population is uncertain, especially over the short to medium term when the newcomers need to be integrated into the economy. Indeed, in the last section “Immigration, income, and productivity growth” and Appendix A of this report we note that immigration tends to negatively affect the measurement of economy-wide productivity over the short term.

Interesting comments and observations! With such massive increases in immigration levels currently, one can only hope that the trends discussed above continue.  However, the warnings in the last two paragraphs replicated above are indeed concerning.  Canada needs immigrants to help it prosper and increase its labor supply.

Notwithstanding, Canada’s infrastructure needs to be ready for large increases in the number of people to ensure that overall standards of living are increased for all and not reduced.  With Canada’s recent challenges in housing, one can’t help but think that Canada is not ready for large increases in the number of immigrants.

 

Bonus Comment – Quote From Diane Ackerman – American Poet, Essayist

 

“I’m certainly not opposed to digital technology, whose graces I daily enjoy and rely on in so many ways. But I worry about our virtual blinders.”

Yep, totally agree!  Can you see your blinders?

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