One Comment About Taxation – The “New” Trust Reporting Rules Need Amendments

 

In the 2018 Federal Budget, as I have previously written about, the new trust reporting rules were first proposed.  These new rules require most trusts – with limited exceptions – to file a T3 tax and information return with expanded reporting on who the settlor(s), trustee(s) and beneficiaries of the trust are.  Such requirements seem benign enough but the amount of information regarding such persons that is required to be disclosed – including contingent beneficiaries – can be daunting.

Draft legislation was released in the summer of 2018 for comment which the Joint Committee on Taxation of The Canadian Bar Association and CPA Canada commented on (and I was a contributor to such a submission).  Such comments received by the Department of Finance were – for the most part – ignored or dismissed.  The scheduled implementation date of the new rules was first proposed to be for the 2021 trust filing year, but it was twice postponed and now the 2023 taxation year will be the first year of implementation.  These returns including enhanced disclosures are, for the most part, due April 2, 2024.

Given the long-delayed implementation date, the trust reporting rules didn’t attract a lot of attention when they were first proposed.  Even when I would lecture or write about such new rules in the days, months and years afterwards, it wouldn’t attract a lot of interest because “that’s not happening for a ways down the road.”

When a second round of draft legislation was released a couple of years ago, the Department of Finance surprised the tax community by “clarifying” that they indeed wanted “bare trusts” to be subject to these new rules as well.  Originally, it was quite clear that bare trusts would be exempt from the new filing rules.  Bare trusts are commonly used vehicles whereby one party often holds legal title for the benefit of someone else but the trust effectively acts as an agent for the beneficiaries.  The existing Income Tax Act rules makes it clear that bare trusts are not considered trusts for purposes of the Act and therefore such an arrangement is ignored when determining income tax issues.

As mentioned, bare trusts are commonly used in many routine commercial activities.  For example, it might be convenient for a corporation to acquire a property and hold legal title on behalf of other investors.  The other investors would ultimately be the ones that need to report any normal income tax consequences (such as reporting income or losses associated with such a property) and not the corporation since that arrangement is likely a trust arrangement and more specifically a “bare trust” arrangement.  There is no income tax mischief associated with such a routine arrangement but now, in the simple example illustrated here, the corporation would need to file a T3 income tax return and report the settlor of the trust, the beneficiaries and the trustee(s).

The income tax community – and specifically the accountants who will be the ones who carry the vast majority of the filing requirements associated with these rules – have finally woken up to how invasive and complex these new rules are…especially as it relates to the requirement to file for bare trusts.

While the Canada Revenue Agency has tried to be helpful by posting information and relaxing certain penalties for bare trusts that do not file on a timely basis for the 2023 filing year, the simple fact is that these new filing requirements are daunting.

Most accountants are not lawyers and thus have very little training and experience in determining whether a certain legal arrangement is in fact a trust (a form of legal relationship).  Accordingly, it can be daunting for most accountants to assess routine legal arrangements and determine whether or not such an arrangement is a trust.  Even accountants like me (who have had decades of practical experience assessing legal relationships) and many lawyers struggle with this basic determination.

The debacle that is the Underused Housing Tax also requires the filers – mostly accountants – to assess legal relationships at the risk of being wrong.

To be wrong in assessing a legal relationship that is in fact a trust can invite expensive penalties if required returns are not filed ($25/day late to a maximum of $2,500 per trust per year or if the non-filing is tantamount to circumstances involving gross negligence then 5% of the highest amount at any time in the year that is equal to the total fair market value of all of the property held by the trust). Ouch!

With the vast shortage of accountants, this is one of the last things needed to be foisted on the tax community.  The foot faults and errors will likely be large.

I don’t think many in the tax community will dispute that the CRA should be able to have certain information to do its job.  However, the new trust reporting rules take this a bit far in providing the government with extraneous information.  Frankly, it is doubtful that the government will be able to make sense – even with the advent and advancement of artificial intelligence – of all of the data that it will receive.

In my view, like the Underused Housing Tax which should have new filing requirements enacted into law soon that will greatly relax some of the requirements to file, the trust reporting rules should be re-thought.  In particular, the requirement for bare trusts should be scrapped in their entirety.

There are lessons to be learned by introducing massive data gathering and reporting rules that are foisted upon taxpayers and their advisors (in particular, accountants).  One of the largest lessons is how tax policy is introduced in Canada needs to change.  For decades, the implementation of tax policy has fallen under the sole purview of The Department of Finance and they proudly state that on their website.  However, such a system is a closed system and does not involve the public unless specifically invited or “consulted” on by the Department.

In my view, it is long, long overdue to re-think such a system so as to involve many more members of the public from the beginning. This would proactively introduce alternate points of view that involve common sense and a measure of practicality when introducing non-politically motivated tax legislation.  Accordingly, should the introduction of tax policy be solely under the purview of the Department of Finance?  In my view, no.  There are better ways to introduce tax policy but that is a column for another day.

In the meantime, consider your own situation and get professional help to determine whether or not certain arrangements that you might have involve a trust.  If they do, you very well might have a filing requirement. If so, be kind to your accountant…they’re struggling with this mess too.

 

One Comment About Leadership – Good Leaders Learn How to Say “No”

 

As leaders grow in their career, add value to their audience, help teammates grow and give back to their community, the common complaint and challenge is that they “don’t have time”.  For many leaders, something has to give and too often it is the leader’s family that pays the price with less time and attention.  Not good.

There are no shortage of books and suggested methods on how to improve time allocation.  I particularly like MacKay CEO Forums’ Time Mastery model (for the record, I am a Forum Chair and the Alberta Regional Director for MacKay CEO Forums).  Such models can be an excellent tool to help gain control of your time and make the most productive use of it.

There are only 525,600 minutes in a year.  Of that, you’ll spend roughly 175,200 minutes sleeping.  Another roughly 21,900 minutes eating in order to survive.  And if you try to take weekends off, that is another 149,700 minutes.  So, in order to get everything you want to get done in a year, you have 178,800 remaining minutes available.  That is only 34% of what you started out with!  And that is not even factoring in that you will likely have exercise time and wasted time as well.

One thing that I have become better at over the years, in order to take better advantage of the time available, is to learn how to say “no”.  As you grow as a leader, there will be more and more demands on your time or less and less available minutes to get stuff done and make tangible progress towards your goals.  Before saying “yes” to an opportunity that has come your way, perhaps the better answer should be “no”.  The risk, of course, in saying “no” is that you may be giving up a great opportunity or experience the “fear of missing out”.  Often people are afraid of that – or don’t want to disappoint people – and so they’re quick to say “yes”.

By politely learning to say “no”, leaders can create discipline in being stingy with utilizing their remaining 178,800 minutes.  While it may appear rude and selfish to say “no”, it is actually the opposite. By saying “no”, leaders have the opportunity to really focus their attention and efforts on their audience and goals rather than being pulled in a myriad of directions and likely disappointing someone because of the lack of attention and time that was not paid to the “yes” that should have been a “no”.

This short Ted Talk on the art of saying “no” is worth a watch to start practicing to say “no”.

 

One Comment About Economics: My Prediction – The 2024 Federal Budget Will Be a “Spend, Spend, Spend” Budget

 

Last week, Canada’s Finance Minister announced that the Federal Budget will be released on April 16, 2024.  While it is certainly better than having no budget (recall that during the COVID years the federal government abused its position and refused to release a budget for over 2 years) but that date is over 2 weeks into the government’s fiscal year.  The point of a budget is to prepare for and release it in advance of an event occurring.  Details…

With the governing Liberal Party being very down in polling numbers, my bold (yeah, not really) prediction is we’ll see little on policy but lots on spending.  And, of course, there will be lots about housing challenges.  We’re already seeing the Prime Minister’s Office directed messaging about housing topics showing up in newspaper articles that basically say nothing about what kind of housing initiatives will be announced but certainly give large hints about spending. For example, this National Post article with the headline “Look for measures to make housing more affordable in federal budget” states the following:

Look for measures to make housing in Canada more affordable in the federal budget next month, says CIBC economist Benjamin Tal. Canada’s housing affordability crisis is expected to be one of the main focuses of the budget when it is tabled on April 16 and Canadians can expect more affordability measures, said Tal, deputy chief economist at CIBC Capital Markets. “The government realizes that housing is a major issue and the next elections will be all about housing,” he said in a recent interview with the Financial Post’s Larysa Harapyn.

A boost for first-time homebuyers is at the top of the wish list for Canadian homebuilders.

Ottawa has determined that Canada must build 5.8 million homes over the next decade to meet housing needs, which means doubling housing starts at a time when construction is slowing, said Kevin Lee, chief executive of the Canadian Home Builders’ Association (CBHA).

The CBHA’s housing market index, which reflects industry sentiment, fell to a record low in the fourth quarter of 2023.

The CBHA recommends the government bring back 30-year amortization on insured mortgages for first-time buyers of new homes to help them overcome financial obstacles and spur more home building.

“Helping first-time homebuyers with changes to 30-year [amortizations] would be the type of thing we need to really change the equation,” he told Harapyn in an interview.

Builders also hope the federal budget offers assistance with bolstering the construction industry’s labour force, with 20 per cent of its workers set to retire within the coming decade.

Lately, as I have written about a lot, the government has been trying to do its best to put its political spin on housing challenges by using the tax system to try to attack various “bogey-men” that are the perceived doers of various evils (those evil short-term rental owners, “flippers”, foreign buyers of Canadian real estate).  It’s good politics but poor policy.  And, frankly, any “new” policy that offers longer mortgage amortization periods, for example, is ripe for disaster.  Would you want to owe on your mortgage for say 50 years instead of 25?  The argument against my resistance is, of course, that a longer amortization period invites more people into owning a house since the down payment would be smaller along with the normal monthly (or whatever period of payments you have) payments.  But this ignores that more interest will be paid over the long term by the homeowners and, of course, puts them more at risk at mortgage renewal time should interest rates increase.

In my view, cooler heads need to prevail here.  You want more homes built?  Well, get the red-tape out of the way at the municipal level and have approvals of new home construction occur faster.  Want more people entering the trades?  Well, reduce federal personal tax rates since good trades people make good income but unfortunately a good chunk of their income is paid in high personal tax rates.  Don’t encourage such people to look to the U.S. to ply their trade where personal income tax rates are much lower.

Overall, government should be providing a macro environment that helps to improve overall productivity, encourage people to risk capital to become entrepreneurs, and enable employees to take home more of their hard earned money (rather than being taxed to death with high personal tax rates, carbon taxes, etc), and have a sensible immigration policy that doesn’t contribute to the housing challenges.

In other words, the federal government should wake up, “get out of the way” and stop trying to micro-manage its way through the housing challenges.  But, of course, that would not be good politics for this current government.

 

Bonus Comment – Quote From Steve Jobs – Famous ex-Apple CEO and Founder – About Learning to Say “No”

 

“Focusing is about saying “no””. [link to a video where he says that here]

 

Yep, totally agree!  Leaders, are you saying “no”?

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