By Leor Margulies
Robins Appleby
I’m sure most of you reading this article have never heard of Bill C-32, which enacted new amendments to the Income Tax Act, as well additional regulations relating to the requirement of trustees to provide a T-3 Return type of certain trusts which qualify under the Act and the Regulations.
In particular, the amendments now require T-3 reporting for all “bare trusts,” whereas in the past, it generally required reporting only for discretionary trusts. Those are trusts where the trustees actually manages the trust and makes decisions regarding investments on the trust. Most developers will be familiar with bare trusts, where they have a nominee holding title to a property on behalf of a joint venture or a limited partnership as the beneficial owners, and it is the beneficial owners that manage the trust property.
You may then ask “What does this have to do with condominium developments and legal costs?” Lawyers are required under Section 81(1) and 81(4) of the Condominium Act to hold all deposits in trust, together with accrued interest, on behalf of purchasers and can only release those monies when prescribed security is provided. This makes lawyers or the law firms trustees of a bare trust holding these trust monies on behalf of purchasers. It is of course arguable that the monies are held for purchasers or for vendors, depending on who ultimately becomes entitled to the deposit in the event of a default by either party or in the event the purchase agreement closes. But currently, the conservative view if that these are purchaser monies, which makes the purchaser the beneficiary and as a result, law firms which are the statutory trustees of these monies, earning the obligation to file T-3 Returns for each individual purchaser on an annual basis. This Return has to include the information such as name, address, date of birth, jurisdiction of residence and the SIN number of Business number.
Negative impacts
Many other industries have been negatively impacted by this legislation, including the oil and gas industry, law firms generally and charitable institutions. These organizations have argued vigorously to the government to exempt them from the application of these reporting requirements. The lobbying did defer implementation of the legislation and regulations for two years, but it finally came into force in December 2022. with impact on reporting on Jan. 1, 2024.
Why should developers be concerned about this reporting requirement imposed on their lawyers for their condominium projects? If the current interpretation of the Regulations continues to hold and CRA does not bend or relax its interpretation of the reporting requirements, each project shall require annual reporting for each separate purchaser. If you look at large projects and the number of purchasers and deposits, this is a significant burden on law firms who will have to develop appropriate software and devote resources to this massive reporting. These costs will be unfortunately passed on to either developers or ultimately, purchasers. There are fines of up to $2,500 per report that is not filed, and if it is deliberate, it can be increased to five per cent of the value of the trust monies – meaning, in the amount of the deposits.
There are a number of exemptions, such as cash of $50,000 or less, monies held in the lawyer’s general trust accounts (not applicable to condominium deposits unfortunately), or monies held for less than three months. There is also an exception for disclosure of information that is subject to solicitor-client privilege. The monies are being held as a trustee on behalf of purchasers who are not clients of the law firm, so it is unlikely that this exemption would apply.
Substantial burden
Other industries have argued vigorously with the legislators before the legislation was passed including, the Canadian Bar Association, federation of any law societies, the oil and gas industry and charities, without success. Most of the complaints are similar to those of the condominium lawyers – the substantial burden of preparing individual returns for hundreds or thousands of purchasers in condominium projects.
You may ask “Why is the government going to all this trouble? What are they going to accomplish?” The position of the government is that if a trust does not earn income, it does not have to file a T-3 Return. That means the government is not getting information on monies that may be money laundered or taxes not paid. The purpose of this amendment is to create more disclosure of information that CRA can go after unscrupulous beneficiaries of trusts who have created structures to avoid payment of tax.
In reality, this reporting mechanism, particularly for oil and gas and law firms, will accomplish nothing. The information on purchasers is already collected by vendors of new condominium units and is available under FINTRAC rules. Requiring law firms to collate and send it on to CRA is a waste of time and money. The oil and gas industry indicated the same thing applies to the requirements for their reporting on oil and gas well trust arrangements. The real purpose of this legislation was to show the world that Canada was taking real steps to deal with money laundering. Of course, having law firms provide the basic information on purchasers provides really nothing on money laundering. The source of those funds and the real purchaser’s identities might be behind the nominal parties who sign purchase agreements will not be disclosed in any event, and CRA and FINTRAC officials have generally done very little to act upon the mountains of information provided to them under FINTRAC reporting rules. So why would we expect that they will do anything with even more information.
Significant efforts
Significant efforts are currently underway, spearheaded by BILD and CHBA to seek either a further deferral of the implementation of this legislation or amendments to the legislation that would permit further exemptions to be issued under the Regulations. However, to do so would require changes to the actual legislation to be approved by parliament. There is another exemption relating to monies that are required to be held pursuant to provincial or federal legislation, but the wording is unclear as to whether condominium deposits would qualify. A ruling by CRA that they do qualify would go a long way to exempting law firms from this type of reporting and creation additional costs.
If the federal government is really concerned about creating affordable housing, adding another $1,000 or more per year per unit for condominium deposits to the purchase price will not do it. We are hopeful that the entreaties of BILD and CHBA will not fall on deaf ears. Unfortunately, for the condominium industry, this particular piece of legislation fell under the radar screen of the real estate industry, and it was only recently that its impact was determined.
Stay tuned, but if your support is required to get the attention of your member of parliament, please look out for further notifications from BILD and CHBA.
Leor Margulies is a partner at Robins Appleby LLP and an executive on the BILD Board of Directors, Toronto. robinsappleby.com
