Taxpayers Better Get Prepared To Relive The Bare Trust Debacle — Again

I recently rewatched the classic movie Groundhog Day . Every morning, Bill Murray wakes to relive the same day. As another trust filing season is less than nine months away, many tax practitioners must wonder whether they will relive a version of that movie soon.

The government proposed rules in its 2018 federal budget to expand reporting and disclosure requirements for trusts with a first-year application date of 2021. A global push for trust transparency was underway and Canada was arguably behind.

The first proposals did not include bare trusts, where the trustee holds legal title to the property, but has no discretionary powers or duties beyond following the beneficiary’s instructions, with the beneficiary retaining full beneficial ownership and control.

That was no surprise. For decades, subsection 104(1) of the Income Tax Act ignored bare trusts for most purposes and looked to the beneficiaries as the taxpayer .

Because of COVID-19 issues, the implementation of the new rules was delayed until 2022. However, bare trusts were swept into the proposed regime by a 2022 amendment, which the Joint Committee on Taxation and other organizations warned against , but was ultimately ignored by the government. The rules were then delayed again to the 2023 taxation year and passed into law.

Bare trusts include some of the most ordinary arrangements in Canadian life: a parent on a child’s home title to help with a mortgage, an adult child added to an elderly parent’s bank account and a nominee corporation used to acquire title to numerous properties for different beneficiaries are common examples. None of these examples are mischievous for tax purposes.

A foundational problem with the reporting rules is determining who needs to file. Determining if the legal relationship is a trust is very much the domain of lawyers — or very experienced accountants — trained in determining the difference between various legal relationships such as trusts, partnerships, agency, joint tenancy, co-ownership or joint ventures.

The difference between all these relationships is subtle, but important and has significant tax implications. However, the duty to file returns is often on tax preparers who are not lawyers.

Given the above, the first reporting period for 2023 was a fiasco. Taxpayers and their advisers mightily struggled after finally waking up to how difficult the new rules were to apply. The CRA , to its credit, devoted real resources to helping taxpayers understand the rules, especially for bare trusts, but it was too little, too late.

The result was that more than 44,000 Canadians filed returns for bare trusts in early 2024, many after paying their advisers, only for the CRA to cancel the requirement days before the deadline. The government was rightfully roasted for this wasted effort.

Chastened, the CRA deferred bare-trust reporting again for 2024 and 2025 while the finance department issued draft amendments in August 2024 and August 2025 to relieve certain trusts — including bare trusts — from filing.

Those revisions are now law after being folded into the 609-page omnibus that became Bill C-15 , which received Royal Assent in March 2026. The new rules apply for most trusts for 2026, with returns due by March 31, 2027.

The revised rules exempt more arrangements than the original version did, but the exceptions are mind-bogglingly complex, best illustrated through flowcharts and aids and the foundational problem remains: tax preparers are still being asked to assess legal questions they are generally not trained to answer, and that is why the 2023 filing season may prove to be a preview for next year rather than a one-off.

Complexity in tax law is often unavoidable. The problem is not complexity in the abstract, but who gets caught in it. The design of the legislation can guarantee a wide catch.

The new trust legislation casts the broadest possible net and then cuts holes in it, a design inherently complex to navigate. The result is that the broader exemptions reduce filings, not effort, and millions must still work through the rules to learn whether a carve-out spares them, even if only a fraction ultimately file.

The costs for non-compliance are real. A late return runs $25 a day to a maximum of $2,500, and the gross-negligence penalty climbs to the greater of $2,500 or five per cent of the highest fair market value of the trust’s property — payable even where no tax is owing.

What will the CRA do with the haul? No one in government has answered that. The agency will gather names, birthdates and tax numbers for the trustees, beneficiaries and settlors of the trusts that do file. Will the information serve a purpose proportionate to the cost imposed on taxpayers?

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Scottish economist Adam Smith saw the issue 250 years ago. Among his maxims of taxation was the canon of convenience : a tax should be levied in the manner most convenient for the person paying it.

Ask a sophisticated taxpayer with a complex structure to navigate complex rules; fair enough. But bare trusts are woven through ordinary life and demand millions of average Canadians resolve questions of trust and agency law under threat of penalties, which is exactly where these rules fail Smith’s test.

Again, the trouble is not complexity; it is complexity imposed on a broad and unsuspecting audience.

There were, of course, better options. The original proposal was far narrower before the 2022 amendment pulled bare trusts into the reporting regime, adding unnecessary complexity on a large and unsuspecting audience. Not cool.

Instead, ordinary families face possible penalties to produce information where it is doubtful the government will put such information to good use. Once again, practitioners will be asked to answer legal questions they were never trained to answer.

The rules have changed; the day has not. Bill Murray, at least, had a screenwriter.

Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody.

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