Welcoming to the podcast Andrew Bateman. Andrew has been a partner at a few places. You’re currently a Miller Thomson LLP. We work together on a few items, the firm and us. And I bump into you in various circles. And am I overstepping by saying you’re the foremost authority on the new trust reporting rule?

I don’t know if there is a foremost authority. There’s so much uncertainty surrounding these rules. I have spoken on them a few times, yes.

Yeah. Well I appreciate you making the time to come on and educate our listeners on. I think it’s going to bite a lot of people. So I guess why don’t we go in and give a brief history of you and sort of how you ended up on this podcast talking about these rules. Let’s chat about that for a sec.

No, I practiced for 15 years or so at a boutique firm in Calgary recently, a couple of years ago, moved over to Miller Thomson and it seems for half of that time I’ve been looking at these trust rules because they first were proposed in the 2018 budget. Well, just like the UHT rules were extended, these rules have been extended twice for two years and you would think there’s possibly a chance that will happen. Again, no indication of it certainly, but these seem to just be kicking down the road for a number of years now. And I think I started presenting on these back almost when they first came out just as a task of civil service at my old firm, if you will. And they keep rearing their head every year.

What is the, how come a 2018 budget proposal takes until, as you say, 2023 to go through? What’s the history there of these rules?

Well, it’s not entirely clear. I think the background trend, as you know in your practice experience, there’s an increased push for more transparency around beneficial owners of property. So you might have somebody who’s a legal owner of property, but they’re holding it for the true beneficial owner whose name isn’t on public records. And some of this goes back to 2017 when provincial and federal ministers were meeting together to talk about changes to the corporate law to indicate who beneficial owners of shares are. Some of those changes have slowly leaked into the Canadian Business Corporations Act. They’ve leaked into British Columbia’s probably the main provincial jurisdiction. I think some of that’s leaked into with Landowner Transparency Registry and even their own corporate act share registry. But throughout that period of time, the CRA has started their own project. It’s not intended to be a public registry, but they’ve started to, I think, turn their mind to trusts and how do we determine who the true beneficial owners are of property so that we can track all sorts of tax issues with those people.

So I guess it may be helpful for, and I always go, okay, everybody knows what a trust is, right? Well, that’s not true. I think that the people who have a family trust in their corporate structure know what a trust is. I think that folks who have had people pass away in their families and there’s an estate that’s a trust, they know what a trust is. But for everybody else who are about to be caught by these rules, a lot of people are about to be caught by these rules that don’t even know what a trust is. And so if we start there, a trust for all you non-lawyers out there is a concept in law that allows you to separate the legal ownership of a property from the beneficial ownership of a property. So you think of, okay, maybe a disability trust or maybe in my will, I want to leave all my money to my kid, but that kid is a spend thrift and so we’re going to drip it out to the kid just enough to survive every year rather than give them all the money at once.

(05:18)
And so that allows a trustee, a person who I designate to manage the funds for the benefit of my kid. And so that concept applies broadly and a lot of, if you start going into all the different scenarios where a trust could exist, where the legal ownership is separated from the beneficial ownership, it’s massive. And these new rules are really bringing that to the forefront because a lot of people who go, oh yeah, trust reporting rules, I don’t have a trust, I don’t have to worry about this. Well, just hold on a second and maybe you want to get through the rest of this podcast because I think there’s a lot of scenarios here, and this is maybe it’s dragged on so long through this legislative process, they proposed rules and then they went and then they said, okay, this is definitive, it’s starting. And then we went, whoa, whoa, whoa.

(06:09)
Actually we’re going to delay this a year. And then back to consultations, and I think the tax community through the years went through these last few years went, okay, bare trusts are going to be a problem. We’re going to talk a lot about bare trust. We’re going to save that till a bit later, but bare trusts are going to be a problem and a big problem. The funny part is that’s sort of the reason we’re on this podcast, podcast and we’ll get to this in the end, is this bare trust animal is massive. And we were hoping as tax practitioners that they would do away with this idea of a bare trust in this legislation, but they very intentionally did not. So that’s sort of the definition of a trust. What’s changed here? What’s changed that is changing for 2023 and let’s kind of gear it towards everybody who already knew they had to file a T3. What’s changed here?

Well, and just to add on to your definition, let’s distinguish between a trust and a bare trust as well, just so people understand that. I mean, I think you gave a pretty good description of a regular trust that can exist in many different forms where property identifiable property of some type is settled with one or more trustees to manage for the benefit of one or more beneficiaries. And in a normal trust, there’s certain powers and responsibilities given to the trustees to manage those properties. So that would cover most of the trusts you described, disability trusts and whatnot. And generally speaking, the income tax act has its own definition for bare trusts. So this term gets bandied about a bit, but generally speaking, a bare trust is the same type of thing where property legal title to property is transferred to a trustee to hold in their name, but it’s called a bare trust because really the only obligation of the trustee is to hold that legal title until the beneficial owner asks for that legal title to be transferred.

(08:16)
That’s the only obligation. Another common example is a parent holding title to an account in trust for their children who are minors, for example. It happens all over the place and it’s just a little bit different in the income tax act. It’s described as a trust where the trustee is reasonably considered to act as agent of the beneficiaries in respect of all of the trust property. So it’s a subtle distinction, but it’s just important to be aware of that. If the trustee can really be viewed as acting at the control of the beneficiaries completely with respect to all property, then that really is a bare trust trust. And as you said, this has really only been introduced over the last year, and it’s an addition to these rules that were first introduced in 2018.

And it’s causing a lot of problems. But back to your original question, the high level of what’s happening is because of the new rules that are introduced, there’s a greater number of trusts and bare trusts now that have to file an annual T three income tax return.

Right?

That’s change number one. Change number two is there’s a lot more information that has to be provided to the CRA.

Okay? Yeah. And so now if I have an Achen family trust and I’ve been filing my T three every year because I’ve got some income in there for me, what’s going to change is the information I need to put on that return help me out with that a little bit.

Correct. And that information is fairly extensive. You have to provide a bunch of information on the setter of the trust. The setter is originally the person who contributes property to settle the trust. But you have to provide basically for that individual address, I believe birthdate tax identification number, which for individuals would be their social insurance number, country of residence during the year, basic details like that for the set lore. But you also have to do that for each beneficiary. You have to do that for each trustee, and you have to do that for each person. That is kind of broadly defined as somebody who exerts an influence over the apportionment of income or capital of the trust. So anybody else who’s drafted into the trust that has some kind of controlling influence.

Okay. Okay. So let’s just talk about this from a practical, regular vanilla family trust perspective. If the Aiken Family Trust had been drafted for the benefit of my kids, I mean that was pretty easy. I know where they live. I know their social insurance numbers. But what if I included my aunts and uncles and their kids? What if I included, what if I settled a trust in benefit for a group that isn’t specifically identifiable? Maybe I settled a trust for all of the current members of an organization that I want to give to charitably or something like that. How am I going to deal with that?

Well, let me answer that in two parts. The first part is, and it’s probably good to get this in earlier in our discussion, why do we care about all of this?

There’s a lot of information to report. Why do you want to listen to this podcast? Why is it important? Well, the other major stick that accompanied these reporting rules is a really large penalty. So knowingly failing to file one of these returns or knowingly omitting information when you file those returns effectively leads most trusts to pay a 5% penalty of the fair market value of all the property they own.

Okay, hold on now. So the Achen Family Trust now has to go and get the various companies that I own, valuated, including my accounting firm. Oh my goodness. And who’s doing that valuation?

Well, that would be up to you, but I can tell you because the CRA anticipates people playing games with valuation, they’ve included some rules in such as it has to be the highest value of the property at any point during the year that is used for that valuation purpose. So who is doing the valuation is probably up to you subject to challenge by the CRA, but it’s supposed to be the highest value during the year.

So if I’ve got an investment account, and we all know investment accounts have peaks and valleys, my 5% for getting this stuff wrong is being charged on the highest fair market value throughout the year

At any point in the year. That’s correct.

The government gets the benefit of the crystal ball on this one where I have to, maybe I’ve suffered a tremendous loss during the year because the market’s crashed or the pending recession or whatever, and now there could be, I can see a scenario here where there’s not even enough capital in the trust to cover the penalty if the market goes the wrong way.

That’s right. And typically the trustee would be on the hook themselves for that as well.

Okay. You got my attention, Andrew. This is pretty serious stuff and thanks. I almost tuned out when we started talking about all the different beneficiaries and collecting all the information and how terribly difficult that’s going to be and what happens if one of the beneficiaries of the trust doesn’t want to give me their sin.

Exactly. That’s one of the unresolved issues because come March 30th, which should be the filing date, I believe for 2024, because the filing date’s 90 days after the start of the year, if you don’t have information that you know need to provide on the return, such as some information from a beneficiary that won’t give you their social insurance number, you’re faced with a tough choice. You either file the return without that information and you could be subject to the penalty or you hold onto that return until you get the information, but then you’re late filing it and you could be subject to the penalty. So you’re caught in a catch 22 if you have information you can’t obtain. And there’s some arguments you can bring to bare to evidence, due diligence, defense under the case law, but it’s sort of, but

Now I got to hire you to deal with that.

Well, yeah, it’s sort of unfair in my view to put people in that predicament,

But the good news is under the existing trust rules, up until 2022, if I didn’t have any income, I didn’t have to kick in a T3, so I don’t have to worry about this stuff if there’s no income in the trust. Right.

Well, or a disposition of capital property. Yeah. Yeah, you’re right. If you had income in the trust or no income in the trust and no dispositions of capital property up until last year in 2022, you never had to file a return, never had to

Subject

To requirements to file an information return, which is always a slightly different calculus. But the 2023 year, yeah, it doesn’t matter anymore if you’re generally speaking, even if you have no income and even if you have no dispositions of property, if you’re an express trust, which is effectively an intentionally formed trust or a bare trust, you need to file the return except for a very narrow selection of carved out trusts, which in most cases isn’t going to apply.

So we’ve got these heavy new reporting rules with a burden of collecting data that in some cases may frankly be impossible to get, or even the beneficial parties to a trust may be impossible to specifically define, let alone get all their social insurance number. And if Uncle Jim doesn’t want to give me a social insurance number, well, I’m facing down a penalty either way. Either I file without it and face a penalty potentially or I don’t file. And definitely face elite filing penalty presuming there’s in tax selling, and not only that, bare trusts are now included, which were never previously included, and they’re included even if there’s no income. Obviously bare trusts don’t have income, but that doesn’t matter anymore. The requirement to have income or capital gains from property or a disposition of property, that doesn’t matter anymore. Those are the big changes. That’s right.

The goal for the CRA is to understand who owns property, both the legal and beneficial owners,

But this bare Trust idea is just scaring the crap out of me because I don’t even know how to identify that in my client list. And I think that by and large, the public is going to go, my accountants got me covered. But the trouble here is a lot of people who are going to be caught by this don’t even have an accountant because all they get is a T4. They get AT four from their employer, they go onto TurboTax, they fill out their tax return, and off we go. But just because they co-signed on their kids’ mortgage, now that’s a bare trust, or they’re on a joint bank account with their child, all of a sudden this unsuspecting taxpayer who has no accountant has to file a T3 or the unsuspecting accountant who isn’t really aware of all the personal financial arrangements of their clients. I mean, we don’t know everything. We can’t possibly know everything. How on earth am I supposed to advise and help my clients in uncovering these issues?

That is the big question with the insertion of the bare trust language into the rules. I think for law firms too, I think the same thing applies like a bare trust term of some sort is used as you mentioned earlier, in many, many different types of real estate transactions and provisions like that can be buried in agreements going back several years. To the extent those relationships are still out there, those clients have an obligation to report. Now, there might be arguments that they don’t knowingly fail to report if they’re not aware of the particular bare trust arrangement, but that’s going to in terms of avoiding the penalty I’m talking about. But that’s going to depend on each case, and it’s going to be very tricky for the CRA to both administer this part of the rules and tricky for the compliance world to get people educated and in line with what’s supposed to happen.

Well, and I think that’s what we’re trying to do here. I asked the question of how would I even know how to tell our clients about this? And I think that’s why. Well, that is why we’re doing this podcast, and I think it might be worth just sectioning off a little bit of time here to just talk about all, I mean we’ve heard in the tax community, and if you follow who I follow on LinkedIn and you chat with who I chat with at conferences, I mean just the possibilities of the variety of ways that this does apply factually in law and creates a reporting obligation. There’s many, many that you didn’t even think about. So maybe let’s take a minute here and just talk about all the weird ones that we’ve heard about, and hopefully the producer of this podcast can just turn this into a list for social media or something. But what are all the ways, Andrew? What are all the

Ways, and you’re talking about bare trusts in particular? I think you start with the most common ones, which are title to real estate, often held in an empty corporation’s name. So that’ll be typical. Another one would be titled to real estate held in parent’s name so that they can possibly secure a mortgage on the property, but really it’s the child of theirs that’s a beneficial owner and they’re just trying to help out child. Then there’s bank accounts that are held in trust by parent sometimes.

That’s a really good one. I’ve gone and spun up bank accounts for my five and seven year olds just to play with.

Absolutely.

Right. And it’s like, here’s how money works kids. Well here’s T3 kids.

On that one. There is a narrow exception, but it’s very narrowly crafted. It is almost to the point of silliness the value in an account. If a trust holds property that’s less than $50,000 in a particular year at all times, then you meet one of the exceptions, but only if it’s very particular types of property. So if you had cash publicly tradable securities, for example, in an account and the total value is less than 50,000, then you probably meet this exception.

(23:25)
However, a lot of trusts, real trusts, not so much bare trusts have been settled with a silver coin or gold coin or something like that historically. And the general view there is even though it’s a coin that the coin or gold coin would be viewed as a commodity, wouldn’t be viewed as cash. And those particular kinds of trusts wouldn’t be exempt because they hold a different type of property than the very narrow exception. So you could have old trusts that think they fit the exception that don’t. Or you could have an account held for the benefit of a child that holds some unique type of investment that isn’t a publicly tradable security or one of the generic types of government bonds that’s allowed. And that trust has to report just because it holds a very different type of property with low value.

So what about if I’m on my mom’s bank account as a joint account holder for estate planning purposes, and she’s got her life savings in there,

Right? Joint account is potentially a little different. A joint account is potentially a relationship where you’re not holding the property or the funds in trust, you’re holding them as joint owners. And when one of you passes the property devolves to the other joint owner.

(25:08)
So that particular example might be okay, but it’s mainly the holding property and trust for a child. And I should mention one thing you might say, well, Andrew, you said the penalty’s 5% of the trust property. So why do we care if I have a little trust account with a thousand dollars in it for my child? I should mention that the minimum penalty is $2,500, the maximum penalty is 5% of the trust property. So in most cases, people are very afraid of that penalty. But as I think about it now, the minimum penalty can also play a big problem here even for small situations.

Right. So you’d mentioned that. Again, this is all, we’re just spit balling here, and this is all based on the specific facts. So please don’t take this as professional advice. Anything we’re talking about, you need to go and talk to your lawyer or accountant. But what if I’m on joint title with my parents’ house, and that’s for estate planning purposes?

Well, it all depends. When you say joint title, it all depends why you’re on title. I mean, joint ownership is different than holding title in trust. I think what might be different is if you are on title for, say your parents’ cottage in BC and they put you on title because they thought, well, for the long term clay, you’re going to hold this property. We’ll just put your name on title from the get go. But meanwhile, they’re paying for the property. They’re living there. They’re the true beneficial owners. That might be an example where you get caught more. So

We just ran across one in our office, and I’m playing a bit dumb here on purpose, but we just ran across this in our office where a lady called to get to ask about a UHT and underused housing tax return for a totally different purpose, but it came up that mom has a property in Kelowna that I’m on title for. And you go, okay, tell me about that. And oh, it’s a rental and mom’s reporting all the income, but the title’s in your name. And it’s like, well, that is quite obviously a trust relationship.

Perfect example.

And not only do you have to file an underused housing tax return, very likely you now also have a T3 return. So you’ve just run into for this simple little agreement that you thought was working out and all the taxes being paid, and everything’s above board here, there’s no malfeasance or foreign ownership that we need to kick out of the country or anything like that. We’ve just got a vanilla common scenario, which has now caused this lady several thousand dollars a year of compliance, maintenance to deal with. And by the way, your profit from your rental just went poof into my fees. And I don’t like collecting fees that way. That’s not how we want to make money here at the accounting firm. This isn’t good money to make and that’s not a value add thing that we’re doing. And then you ask yourself, well, what could the government possibly gain from having all this information? So that was a scenario that just popped up.

Yeah, I think that’s an open-ended question. I think it’s just they want more information. And some of the stories in the media over the years about people using shell corporations to hide true ownership and that type of thing, offshore, this has really made its way onshore where the series, just doing everything they can in the trust world and possibly going to extend elsewhere to track all true beneficial owners of property. And it can have impacts, as I think about it, telling whether corporations are associated, for example, and whether they can share a small business deduction. It can have a variety of impacts that once the CRA has this information, they’ll be able to dig into and target their audits in different ways.

Right. And I mean, I don’t even know if the form is finalized yet. I’d have to check on that, but

I don’t think,

And here we are coming up on the end of the year required to gather a bunch of data in the firms. By the way, this happened, when did they move the target last year? This was supposed to happen last year.

Yeah, I can’t recall the exact date. Date, but it was fairly late. It was late in the year.

Late, yeah,

I want to say late November they did release, I think, I don’t know if it’s draft or final, but there’s a Schedule 15 for the T3 return that you can find on Google that lays out the type of information they want to see from the different entities. We talked about, trustee, beneficiary, et cetera. But there’s reference made to the T three guide, and there is no 2023 T three guide that I could find available that talks about this.

And so I’ve just, we’ll include the schedule 15 in the show notes to this. And Andrew, is there anything else that you think people might want to know about?

Yeah, I think probably the biggest thing just to, not that I want to create a bunch of work for you that you don’t like, but I think this very first reporting is probably the most burdensome one for a lot of different trusts. And I’ll give you an example of why. And it’s partly drafted the legislation so broadly, so I mentioned there’s a settler before you have to report. Usually that’s the person who first transferred property to the trust,

Right?

Well, they’ve defined that as any person who’s ever contributed property to the trust. So that could be for an old trust, the setter and anyone else over time who has contributed property to that trust,

Would that be lending money to the trust lending to the trust?

Even if it’s a loan or a transfer of property, there’s a narrow exception. If it’s an arm’s length person who loans property at a reasonable rate to the trust or transfers property at fair market value, then you don’t have to include those people.

But it has to be arm’s length.

Arm’s length. If you’re a related person, if you’re related or an arms length family member, and you sell property to the trust or you loan property to the trust, all of a sudden you’re another settler. So you have to go back.

What if covered the expenses? What if last year my trustee paid my bill for the fee for preparing the T3 and then was reimbursed from the trust? Was that a loan for a moment in time? I guess the trustee’s already going on there, but do they have to go in the settler category now?

Yeah, I think you’d have to look at that on a case by case basis. I think that if it’s just a normal situation of somebody’s paying the funds on behalf of the trust and it’s a reimbursement for that, I’m not sure that’s necessarily a loan, could be more of just an agency that’s happening, but it could be depending on the situation. I’ve seen situations where an individual has paid the expenses of a trust and not sought reimbursement. Well, if you don’t seek reimbursement, then that is a contribution

(33:42)
It’s an interesting question you raised. I haven’t actually thought about that in great detail about just the simple reimbursement of expenses that are paid transactions.

And when we settle a family trust, often you settle it with trust properties. But I remember a time when we used to do, there used to be loans made in at the same time for various purposes to go and acquire property shares of a family company or whatever. So now you need to go back and look at how all these trusts were settled and we’re talking back to what the start of time, the inception of the trust,

Depending on when it Yeah, exactly. And after the first return, it’s not going to be so bad. You’ve got everything reported and you can roll it over, but that will be a problem. And

(34:37)
The definition of beneficiary is also pretty broad. Like you mentioned earlier. You’re supposed to report everybody you can ascertain as a beneficiary. So if there’s, say you said in your example earlier, everybody who’s part of a particular organization would be a beneficiary. Well, if you can reasonably identify who those people are, then you’re supposed to put all their information in there, whether there’s no exception for somebody who doesn’t give you their information. Now, if you can’t reasonably ascertain who those people are, there is an ability to just describe the process that’s in your trust as to how you would determine who the beneficiaries are. But there’s an uncertainty there because there’s going to be lots of situations where, you know what? You can sort of figure out who the beneficiaries are. You just don’t want to go out and gather all their information.

That was only supposed to happen at one point in time, eventually down the road or whatever the reason for your trust was. Right?

And now we

Have to do this annually. What a brutal exercise.

So that’s clear. And then I think even the persons who can exert influence over the trust is unclear. Typically that’s somebody like what we call a protector, somebody that can change trustees. Well, that’s probably clearly a person who can exert influence over the apportionment of trust property in an indirect way, I guess by changing the trustees, but a trickier one. And just as an example, more for trust companies where you have a professional trustee, professional trustee managing a trust.

(36:35)
Who at the trust company is the one that has to report? Is it the manager of the particular file for a trust? Is it the directors of the trust company who’s acting as trustee? Is it any level of executive or other person within the organization? How do they cover that off and how do they cover off their risk? Just another example of the ambiguity. These rules right now that are just one would presume there will be more guidance given before reporting time, but there hasn’t been yet. And these rules have been in draft form since 2018, as I said,

Unbelievable. Unbelievable. And hopefully they get pushed a little more. Is that all you think we need to talk about today, or is there anything else that you can think of that we might want to throw in here?

I think those are the key things. I think the challenge for a business like yours is just dealing with the massive increase in compliance and fees that creates no value for your customers.

I’m the bad guy now.

Yeah, that’s frustrating.

Yeah. Okay. So I guess just to cap this off, I’d like to place a friendly wager. I would just want to see if you’ll commit how much of Miller Thomson’s capital, or sorry, spending account, will you commit to them pushing these rules off again.

As a percentage? Yeah. When it comes to the CRA, I’ll commit 0% of my own funds for sure. I can’t take that.

But whether they’ll push it off again, I can’t believe they would push it off again. They’ve been kicking it down the road for so many years. It would be a real cop out to push them down the road again. But at the same time, nothing will surprise me. They waited till the exact last minute, as you know,

(38:55)
And with some of the uncertainty around how bare trusts are going to operate here, possibly they could punt it again because of the new bare Trust uncertainty. But I have to think one of these years, when they keep promising their in force, they have to go ahead with it.

Yeah. Well, thank you so much Andrew Bateman for being on the podcast and talking about these incredibly complex and wide sweeping trust reporting rules that I’m not looking forward to dealing with. But here we are dealing with them. So I appreciate you making the time to come on today.

Oh, thanks for having me on.