Tax in the News: Tax Tumult – The Real Cost of Canada’s Hasty Bare Trust Policy Reversal

In the realm of family-owned enterprises in Canada, recent developments surrounding the Canada Revenue Agency’s (CRA) administration of the Department of Finance’s reporting rules for bare trusts have stirred significant concern and frustration among taxpayers and tax professionals alike. As a tax expert dedicated to guiding families and their businesses through the complex landscape of tax obligations, I find it imperative to discuss the impact and implications of these rules, especially considering the tumultuous journey they have taken over the past tax season.

The Cost of Compliance

Recent findings from a survey conducted by Joseph Devaney, a director at Video Tax News, and reported by Erica Alini in The Globe and Mail, have shed light on the substantial financial and operational burdens faced by Canadian accounting firms due to the CRA’s now-retracted bare trust reporting requirements. The survey suggests that accountants and their clients may have spent close to $1 billion—specifically, an estimated $905 million—in preparation for compliance with these rules—efforts rendered moot when the CRA announced a last-minute decision not to enforce them for the 2023 tax year.

This financial figure is not just a number, but a reflection of the real, palpable strain placed on the resources of small and medium-sized enterprises. The average costs incurred per firm—encompassing training, client charges, and unsubmitted or unbilled work—were reported in the Globe and Mail article as follows: about $13,000 spent on training staff, around $11,000 charged to clients for preparing bare trust files, and an additional $12,000 incurred in preparing returns that hadn’t yet been submitted or billed. These figures paint a clear picture of the disruption caused by the hasty implementation and subsequent reversal of these requirements.

Insights from “Tax Chaos Exposed”

Echoing this observations, I expressed this frustration in my blog “Tax Chaos Exposed: No Bare Trust Filings for 2023 and How Last-Minute Policy Flip-Flops Are Costing Canadian Businesses Big-Time,” the severe implications of these erratic policy changes. Here I noted:

“The repeated instances of backpedaling and the introduction of complex regulations underscore a significant disconnect between policymakers and the realities of tax compliance. Given this backdrop, it’s imperative that future tax policies undergo rigorous vetting by the very professionals who understand their nuances best—accountants and lawyers. Such a collaborative approach could help avert the confusion, frustration, and needless expenditure that seem to have become hallmarks of the current administration’s approach to tax policy.”

The Frustration of Flip-Flopping

Our firm has invested significant effort into understanding and educating our clients and our peers in the industry on bare trust requirements. This abrupt policy change by the Department of Finance, coupled with the CRA’s late communication, has been a source of considerable frustration. Not only did it result in financial losses for firms and clients, but it also undermined trust in the stability and predictability of tax legislation.

This is far from the first instance where sudden policy shifts have caught businesses off guard. A prominent example was the last-minute postponement of the 2022 Underused Housing Tax (UHT) filings, along with a revision of goals through exemptions introduced for 2023 filers. These abrupt changes lead to frustration andescalate the compliance costs for diligent taxpayers striving to keep up with the constantly evolving tax regulations.

The Unintended Consequences

The introduction and sudden withdrawal of the bare trust reporting rules highlight a critical issue: the unintended consequences of poorly vetted tax legislation. The requirement to suddenly file returns for such bare trusts, followed by the reversal of this decision, has led to confusion and strain among taxpayers.

The Need for Better Policymaking

This scenario underscores the need for thoughtful, well-considered policy decisions in tax legislation. Politicians and policymakers must recognize the real-world impacts of their decisions, particularly when they affect the foundational financial operations of family-owned businesses. Quick pushes through legislative changes without adequate preparation and consultation can lead to significant disruptions and financial losses, as vividly demonstrated by the bare trust debacle.  This underscores critical flaws in the process of recent tax legislation. CPA Canada has pointed out the unintended consequences of broadly applied trust reporting rules that inadvertently involved a diverse range of Canadians. The organization has been actively working with the CRA to rectify these issues, but this situation highlights a missed opportunity for earlier and more meaningful consultation with tax professionals and policymakers before such policies were enacted. This incident emphasizes the need for a comprehensive review and potential simplification of the tax system, advocating for consistent and proactive engagement between government bodies and the private sector to develop legislation that is practical, clear, and beneficial, avoiding disruptive and costly policy reversals in the future.

Moving Forward

As we look to the future, tax professionals and policymakers alike need to engage in more robust dialogue and consultation before implementing such sweeping changes. This will help ensure that tax legislation serves its intended purpose without placing undue burdens on the citizens it is meant to regulate. Indeed, CPA Canada

For our clients and other family-owned enterprises, our firm remains committed to providing up-to-date, informed guidance through the ever-evolving tax landscape. Our promise to you, as encapsulated in our tagline, is to help articulate your ambitions and guide you towards achieving them, despite the challenges that may arise along the way.

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Shajani CPA is a CPA Calgary, Edmonton and Red Deer firm and provides Accountant, Bookkeeping, Tax Advice and Tax Planning service.