Post # 5 / Damage Control
In the last post HCBT had recommended S1 & S2 access the Voluntary Disclosure Program [VDP] to possibly reduce the penalty component of their $20,000 tax problem. However, timing was an issue.
CRA public information states that most Certificate of Compliance [CofC] requests will be processed in 30 days. The 30-day target presumes no unresolved prior year issues. After receiving the offer, consulting with the lawyer / HCBT less than 30 days remained before closing date. The CofCs must be presented to the purchaser’s lawyer on closing to avoid withholding from the sale proceeds.
The VDP submission to correct the 2013 to 2015 deficiencies must be completed and submitted before the CofC request. S1 & S2 had to scramble at the last minute to assemble old financial information from 2013 to 2016 so the proper reporting on departure and rental reporting can be completed/submitted. Even with professional help and utilization of the VDP there was a real risk the CofC review would not be completed on time to prevent withholding of sale proceeds. If so, the process could be extended for several months, delaying the tax refund.
S1 & S2 also needed to understand why the sale of their family home was not tax free, which is what most of the Canadian tax paying public thinks. The theory is that 1 family unit [2 spouses plus children under 18] can own 1 family home / principal residence without paying tax on any gains realized on that home. The tax mechanics to accomplish this are based on a formula
Exempt Gain = Total Gain Realized x Principal Residence Years / Total years of ownership
Principal residence years are the years the taxpayer used the property as a family home plus 1 bonus year to allow for mid-year transactions. In most cases the years of usage and the years of ownership are the same, so 100% of the gain is exempt. However, in Expat or rental conversion situations a problem results. Any year after ceasing to be a resident of Canada does not count in the top half of the fraction. S1 & S2 had a change of use to a rental property just after departure. Rental years do not count in the top half of the fraction. The mechanics of the formula are such that the sheltered gain percentage gets smaller with each passing year after departure from Canada.
US Implications: The use of the family home as a rental property and subsequent sale will also have US tax consequences, which are not discussed as part of this series of posts.
If you want to know how HCBT can help, see post # 6.