Post # 4 / Financial Damage Control

In the last post we outlined the tax compliance and reporting issues that S1 & S2 had not dealt with in tax years 2013-2015 inclusive.  This created over $20,000 in tax, penalties and interest.  Here are the main points of our discussions.

S1 & S2 were primarily concerned with getting the Certificate of Compliance [CofC] so that no funds are withheld from the sale proceeds – they want to submit the CofC request and hope the issues in 2013 to 2015 are not questioned.  They were unsure why this process was so onerous when the sale of their family home should be tax free.

HCBT Response: The documentation required to obtain a CofC is quite extensive.  The submission form specifically asks the following:

  • how the property was used while the owner was non-resident [ e.g., personal use, business use, rental, etc];
  • about Canadian tax reports filed for business and rental activities of the property;
  • a proforma calculation of the capital gain and/or income earned and the tax owing on the disposition of the property;

CRA essentially conducts a desk audit of S1 & S2 Canadian tax compliance to ensure all required returns / reports have been filed, any tax has been collected, before funds leave Canada.  CRA will use S1 & S2’s social insurance number to check all activities that might have a Canadian tax balance owing.  With this information it will be obvious to CRA that there are compliance problems in the year of departure and subsequent.  If no CofCs are obtained substantial funds will be withheld from the sale and placed on deposit with CRA.  S1 & S2 will have to file Canadian personal tax returns to recover the excess withholding.  After receiving the returns CRA will do essentially the same desk audit before processing the refund.

HCBT Alternative Approach:  CRA has a voluntary disclosure program [VDP] that allows taxpayers to correct prior year tax deficiencies.  If certain conditions are met, only the tax and interest must be paid but not penalties.  Given that penalties are a significant portion of the $20,000 financial exposure using this program could be of serious  benefit to S1 & S2.  To be accepted the taxpayer has to voluntarily initiate the corrections before CRA is investigating the taxpayer.  Secondly, complete disclosure of all issues is required.  The taxpayer cannot selectively disclose tax problems.

If S1 and S2 are going to access the benefits of the VDP they must submit most if not all of the corrective information on the 2013 to 2015 issues before the is CofC submission request is made.

If you want to know how this story ended, see post # 5.


Post # 3 / What Went Wrong – Specifics / Financial Risk Created

In the last post S1 & S2 were dealing with the shock of over $20,000 in tax, penalties and interest plus the possible delay of the sale of the family home.  These following compliance deficiencies were identified.

Tax Year of Departure 2013

  • S1 did not file prescribed “List of Properties by Emigrant of Canada” to disclose 50% interest in family home plus $75,000 RV personal use property. Penalty for failure to file $2,500;
  • S2 did not file prescribed “List of Properties by Emigrant of Canada” to disclose 50% interest in family home plus 1,000 shares of previous employer. Penalty for failure to file $2,500;
  • S2 did not file prescribed “Deemed Disposition of Property by Emigrant of Canada” or a tax return to report $55,000 accrued gain on 1,000 shares of previous employer. S2 will owe CRA approximately $4,500 for unpaid tax, late filing penalty, and interest because no return was filed in 2013;
  • S1’s return will be adjusted to disallow the spouse credit because S2 revised income exceeds allowable limit. S1 will owe CRA approximately $2,300 for unpaid tax and interest.

Tax Year 2014

Because they were renting their family home on a breakeven basis S1 & S2 did not think they had to report this activity to the US or Canadian tax authorities.  For Canadian purposes the gross rental income is subject to non-resident withholding tax of 25%.  This should have been remitted to CRA in the month following the rent receipt, unless elective procedures followed and a special rent return is submitted by June 30, 2015.  The elective return reports rental income net of expenses and tax is charged at normal Canadian marginal tax rates on the net profit only. Often the tax owing at marginal rates on a net basis, is relatively nominal compared to the 25 % withholding

  • No elective procedures or special rental return has been filed. CRA can charge $5,400 [$1,800 per month for 12 months @ 25%] plus interest for late payment;
  • S1 & S2 held the property jointly. Both should have elected and filed special rental return on their respective share;

Tax Year 2015

  •  No elective procedures or special rental return has been filed by June 30, 2016. CRA can charge $5,400 plus interest for late payment;

 This looks really bad, if you want to know how Hanson Cross Border Tax helped S1 & S2 minimize the financial damage, see post # 4 next week.

expanding into the US

Compliance Lapse / What Went Wrong / Financial Risk Created

In the last post we described sanitized facts based on a real client situation.  This scenario is typical of what Canadian Expats face on a foreign work transfer.  There are unique Canadian and US tax and disclosure requirements upon relocation from Canada to the USA.  It is unlikely that even the most financially knowledgeable individuals would properly discharge these responsibilities without seeking professional help in advance.   Failure to satisfy disclosure requirements can and do result in substantial penalties, even if no tax is owing.  This post uses a Canada / USA relocation to illustrate but the same principles apply when departing Canada for any country.

In August 2016, S1 & S2 consulted a lawyer about the upcoming sale of the family home.  The lawyer advised that because they were non-residents, each would need a Certificate of Compliance [CofC] obtained from Canada Revenue Agency [CRA].  Otherwise the purchaser would have to deduct $225,000 [$900,000 x 25%] from the sale proceeds of the family home and remit these funds to CRA.  The lawyer advised that this is a standard process for real estate purchases from a non-resident.  S1 & S2 cannot avoid the CofC requirements by selling the property to another purchaser.

S1 & S2 consulted Hanson Cross Border Tax.   Based on a preliminary review of their fact situation, the potential tax, penalties and interest on reporting deficiencies exceeded $20,000.  S1 & S2 were shocked because they had always been told the sale of the family home is tax free.  They thought the sale would be straightforward.

 This discovery was only the beginning, if you want to know where S1 & S2 further went wrong, come back next week to see post # 3.


american citizens in canada

Our website and letterhead uses “HCBT” as an abbreviation for Hanson Crossborder Tax Inc.  After the next few posts HCBT could also mean Hanson Cross Border Tragedies.  These are real life sanitized client stories to illustrate the financial and emotional burden created if cross border tax situations receive inadequate care and attention. The first in the series involves a typical Canadian family in which the main breadwinner gets the chance of a lifetime to relocate to the USA at a substantially higher salary.   Canadian Expat Post #1 will summarize the facts, common to many Canadians that relocate to the US for career purposes.

Post #1 Background 

  • Family of two Canadian spouses plus 2 young children lives Ontario [S1; S2; C1; C2];
  • Family home is owned jointly by S1 & S2. Purchased in 2008 for $450,000; Estimated value in December 2013 $600,000;  Expected value increases $50,000 in each subsequent year;
  • S2 employed in previous years. Primary responsibility now is care of C1 & C2;
  • S2 owns 1,000 shares from a previous employer stock option program. Shares cost basis is $5,000.  Estimated value in December 2013 is $60,000;
  • S1 employed by Canadian employer for $150,000 CDN per year;
  • S1 has self-directed RRSP with $100,000 in mutual funds / ETF’s. Maximum contribution has already been made earlier in 2013;
  • S1 purchased a recreational vehicle for $75,000 in August 2013;
  • In early December 2013, S1 is offered a position with Texas company with an annual base compensation of $225,000 USD;
  • Family relocates to Texas in December 2013; rents apartment so S1 can start a new job on January 2nd, 2014;
  • S1 & S2 decide to rent the Ontario family home rather than sell it. S2-B, brother of S2, lives near the family home.  S2-B will obtain tenants, repair and maintain property, collect / deposit rents for fee of $200 per month.  S2-B has no previous experience in rental property management.
  • Tenants move in on January 2, 2014 and pay rent $1,800 per month. S1 & S2 expect that they will breakeven costs versus rent.  Tenant rent is deposited into joint bank account of S1 and S2 at an existing Canadian bank account.
  • S1 & S2 did not seek legal or financial advice about selling or renting the family home;
  • S1 prepared and filed a 2013 T1 return reporting employment income, RRSP deduction, spousal credit;
  • S2 had no income and therefore did not file a 2013 T1 return;
  • S1 & S2 prepared and filed joint US returns for each 2014 & 2015, reporting only US income, i.e. Texas employment earnings;
  • On August 30, 2016, S1 and S2 receive an offer to sell the Family home for $900,000 with closing date on September 30, 2016.

Unfortunately, tax planning was not considered by the family described above. Next week please come back to read post #2 of this series and let’s see what happened.