Category: Domestic Tax

Breaking news! The CRA will not require bare trusts to file a T3 Income Tax and Information Return (T3 return), including Schedule 15 (Beneficial Ownership Information of a Trust), for the 2023 tax year, unless the CRA makes a direct request.

Changes requiring more trusts (and estates) to file tax returns and more information to be disclosed, first proposed in the 2018 Federal Budget, were delayed several times in the legislative process. As such, many trusts and estates (including many arrangements not commonly considered “trusts”) will be required to file for the first time.

Required reporting has been expanded to include situations where a trust acts as an agent for its beneficiaries (often referred to as a bare trust). This occurs when the person on title or holding the asset is not the true beneficial owner but rather holds the asset for the benefit of another party. There are many common situations that may constitute reportable bare trusts in which no lawyer or written agreement may have ever been involved or drafted. Many parties involved in a bare trust arrangement may not realize that they are, much less that there may be a filing requirement with CRA.

The following lists some examples of potential bare trust arrangements; CRA has not commented on several of the examples below. It is uncertain how they will interpret and enforce the law.

• a child on title of a parent’s home (without the child having beneficial ownership) for probate or estate planning purposes only;
• a parent on title of a child’s property (without the parent having beneficial ownership) to assist the child in obtaining a mortgage;
• one spouse being on title of a house or asset although the other spouse is at least a partial beneficial owner;
• a parent or grandparent holding an investment or bank account in trust for a child or grandchild;
• a corporate bank account opened by the shareholders with the corporation being the beneficial owner of the funds;
• a corporation being on title of an individual’s real estate, vehicle, or other asset, and vice-versa;
• assets registered to one corporation but beneficially owned by a related corporation;
• use of a nominee corporation for real estate development purposes;
• a property management company holding operational bank accounts in trust for their clients, or individuals managing properties for other corporations holding bank accounts for those other corporations; • a lawyer’s specific trust account (while a lawyer’s general trust account would largely be carved out of the filing requirements, a specific trust account would not); and
• a partner of a partnership holding a bank account or asset for the benefit of all the other partners of a partnership.

In addition to bare trust arrangements, other trusts that have not had to file in the past may have a filing obligation under these expanded rules.

Exceptions from filing a return for trusts and bare trust arrangements are available in limited cases. If filing is required, the identity and residency of all the trustees, beneficiaries, settlors, and anyone with the ability (through the terms of the trust or a related agreement) to exert influence over trustee decisions regarding the income or capital of the trust must be disclosed.

Failure to make the required filings and disclosures on time attracts penalties of $25 per day, to a maximum of $2,500, as well as further penalties on any unpaid taxes. New gross negligence penalties may also apply, being the greater of $2,500 and 5% of the highest total fair market value of the trust’s property at any time in the year. These will apply to any person or partnership subject to the new regime.

ACTION ITEM: Consider whether you may have a bare trust arrangement. If so, or if you are unsure, contact us to discuss.

Executive summary

The General Anti-Avoidance Rule (GAAR) allows the Canada Revenue Agency (CRA) to assess tax where a taxpayer follows the letter of the law but not its object, spirit, and purpose causing a misuse or abuse of the Income Tax Act (Act). After years of the GAAR provisions remaining mostly unchanged, in the 2023 Budget, the federal government proposed some substantial changes in response to recent jurisprudence and the government’s concern that tax planning was increasingly circumventing the current GAAR.

The amendments, which would broaden the scope of the GAAR, are currently before the House of Commons as part of Bill C-59. Once enacted, the expanded GAAR will apply retroactively to transactions occurring on or after Jan. 1, 2024, except for the penalty which will apply to transactions occurring on or after Royal Assent. 

The proposed expanded GAAR appears to reflect Canadian and global tax policy trends around addressing and preventing strategies that exploit perceived loopholes.

Summary of amendments

Preamble – The government proposes to add a preamble to guide the interpretation of the GAAR. It also seeks to clarify that the GAAR is meant to strike a reasonable balance between protecting the tax base, i.e., limiting aggressive tax planning, and taxpayers’ need for certainty in planning their affairs.

Avoidance transaction – For the GAAR to apply, there must be an avoidance transaction. As part of the amendments, the government proposes to capture additional transactions by lowering the threshold to qualify from the “primary purpose” test to “one of the main purposes” test. This lowered threshold now means that if one of the main purposes of the transaction was to obtain a tax benefit and the transaction (or series of transactions of which the transaction is part of) results directly or indirectly in a tax benefit, then it would be an avoidance transaction.

Economic substance – Under the amended rules in Bill C-59, an avoidance transaction that significantly lacks economic substance is an important consideration when determining whether there was a misuse or abuse of the Act.

The factors that may establish that a transaction lacks economic substance are:

• no substantial change in the opportunity for gain or profit and risk of loss of the taxpayer and non-arm’s length persons,
• the expected value of the tax benefit exceeds the expected value of the non-tax economic return, and
• the entire, or almost entire, purpose for undertaking or arranging the transaction or series was to obtain a tax benefit.

This list is non-exhaustive, and the government confirmed that these factors are to be read disjunctively – meaning that not all factors would need to be present to indicate a lack of economic substance. However, if the rationale underlying a provision is to encourage a particular policy, then it could result in a finding that there is no misuse or abuse in appropriate circumstances, for example, utilizing a tax-free savings account.

The economic substance requirement arguably already exists within the current GAAR case law, so it is debatable how much of an impact codifying this rule will have.

Penalty – The government opines that the current GAAR is not a sufficient deterrent to misuse or abuse of the Act as a taxpayer is simply denied the tax benefit. The amendments propose to introduce a penalty of 25% of the tax benefit obtained when the GAAR is found to apply, less any gross negligence penalties. The penalty can be avoided if the taxpayer can demonstrate that at the time the transaction was entered into, they relied on published administrative guidance or court decisions regarding an ‘identical or almost identical’ transaction such that it was reasonable to conclude the GAAR would not apply. This is called the ‘due diligence defence’ and as the CRA notes, it is a very high threshold. The penalty could also be avoided if the transaction was disclosed to the CRA under the mandatory disclosure rules (MDR) either voluntarily, or as required by legislation.

Reassessment period – The CRA normally has three or four years from the date of reassessment to reassess a taxpayer. The GAAR amendments propose a three-year extension to the normal reassessment period for GAAR assessments unless the transaction was disclosed under the MDR.

This article was written by Sigita Bersenas, Mamtha Shree and originally appeared on 2024-02-06. Reprinted with permission from RSM Canada LLP.
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The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

Various automobile deductions and taxable benefit rates are limited to amounts prescribed by the Department of Finance annually.

On December 18, 2023, the 2024, limits were announced as follows:

The limit on the deduction for non-taxable allowances paid by an employer to an employee using a personal vehicle for business purposes will increase in 2024 by 2 cents to 70 cents/km for the first 5,000 km driven and to 64 cents for each additional km. For Yukon, the Northwest Territories and Nunavut, the tax-exempt allowance will continue to be 4 cents/km higher, which is 74 cents for the first 5,000 km driven and 68 cents for each additional km.

The ceiling on the capital cost for CCA of most passenger vehicles will increase to $37,000 from $36,000, and the limit for zero-emission passenger vehicles will remain at $61,000.

The limit on leasing costs will increase to $1,050/month (from $950/month) for new leases entered into on or after January 1, 2024.

The maximum allowable interest will increase to $350/month (from $300/month) for new loans entered into on or after January 1, 2024.

The general prescribed rate used to determine the taxable benefit relating to the personal portion of automobile operating expenses paid by employers will remain at 33 cents/km. For taxpayers employed principally in selling or leasing automobiles, the rate will remain at 30 cents/km.

ACTION: Compare automobile allowances and other payments made against the limits to determine whether expenditures that do not reduce tax are being made.

The Federal government has introduced new proposed measures to disincentivize short-term rentals that aren’t in compliance with their local jurisdiction as of January 1, 2024.  This joins other housing affordability legislation like the Underused Housing Tax Act. 

The 2023 Federal Economic Statement noted that in the cities of Toronto, Montreal, and Vancouver, there are an estimated 18,900 homes that were being used for short-term rentals (and more than half of Toronto’s short-term rentals are unregistered). 

These new measures may result in increased rental income by the taxpayer, making the short-term rental business model less appealing and viable.  Read further details in this article, written by RSM Canada.

An August 24, 2023, Federal Court of Canada case reviewed whether the taxpayer’s employment had ceased due to misconduct, which would render the taxpayer ineligible for employment insurance. The taxpayer worked at a community health care centre that required all employees to provide proof of full vaccination against COVID-19 unless they provided evidence of a valid medical reason or they had a valid human rights reason (including religion) in accordance with the Ontario Human Rights Code for not being vaccinated. The Social Security Tribunal found that the taxpayer lost his employment due to his own misconduct because he was aware of his employer’s vaccination policy and the consequences of not complying. The Court found that this decision was not unreasonable.

ACTION ITEM: An employee’s cessation of employment due to their failure to comply with the employer’s vaccination policy may result in that individual being ineligible for employment insurance.

A June 12, 2023, Court of King’s Bench of Alberta case reviewed CRA’s application to revive a corporation dissolved in 2020. The former sole shareholder opposed the application. The corporation’s capital losses (as quantified during an audit of the 2013 and 2014 years) were used in 2017 and 2018. CRA sought to revive the corporation and issue notices of assessment for 2017 and 2018.

Revival granted

Under the Alberta Business Corporations Act, a creditor has standing to ask that a dissolved corporation be revived. While taxpayers remain liable for tax when income is earned, the liability does not become a debt until taxes are assessed. As no notice of assessment had been issued, CRA had no standing as a creditor. They would only become a creditor if they issued a notice of assessment. This created a circularity issue as an assessment could not be issued to a dissolved corporation. However, the Court has the power to designate someone as an “interested person,” allowing the designated person to revive a dissolved corporation. The Court found that CRA had a valid interest in the revival and sought this remedy to further its interest; that is, to issue a notice of assessment to convert the taxpayer’s liability for taxes into a debt. While the revived corporation would have no assets, no property, no directors, and no shareholders, a dissolved corporation that has been revived is deemed to always have existed. CRA argued that they could pursue the former shareholders on the basis that assets were transferred on dissolution to non-arm’s length parties for less than fair market value consideration. Similar rules are applicable in other provinces.

ACTION ITEM: Dissolving a corporation may not protect former shareholders from CRA taking measures to collect a tax debt.