Failing to comply can be costly
by Arun (Ernie) Nagratha, CA
Edited By: C. Todd Trowbridge, CA |
While servicing Canadian expatriates, my colleagues and I have come across various situations with common characteristics that pose a problem when a taxpayer either does nothing with respect to their departure year tax filings or files them incorrectly.
A common example is where a tax payer is seen as a non-resident of Canada for tax purposes, either because he has limited ties or is deemed to be a non - resident of Canada under a tax treaty with another country. Let us assume the tax payer owns a home at the time of leaving Canada and rents the home to an unrelated person(s) at market value before leaving Canada. Also let us assume the taxpayer does not file a tax return for the year of departure, or files a regular T1 General tax return because he is not aware of the filing requirements. What has the taxpayer done wrong?
The purpose of this article is to outline, without going through all the detailed mechanics, what the filing requirements of the taxpayer are and the penalties for non-compliance that the Canada RevenueAgency(CRA) will likely charge the taxpayer.
Typically, filing a tax return late is not an issue if the taxpayer is in a tax refund position since the late filing penalty is based on the tax owing as at April 30 of the year following the year of departure. However, penalties can still arise in the case of an individual becoming a non-resident since there are various additional forms and disclosures that are required to be filed by April 30th that carry separate late filing penalties not related to the tax owing on the taxpayer’s return. The application of penalties by CRA for non-compliance can be strict.
Disclosure of Property
Form T1161 – List of Properties by an Emigrant of Canada is a disclosure form that is required to accompany a part-year departure tax filing for the tax year an individual emigrates, if the fair market value of all properties the taxpayer owned when he left Canada was more than $25,000, except for certain assets that are excluded. An asset such as a family home is included in the list, and it is likely that the value is in all cases greater than $25,000. By not filing this form by April 30th of the year following the year of departure, the penalty accrues at $25 per day to a maximum of $2,500. This means that a married couple that has joint ownership in a property could be looking at a penalty of $2,500 each for simply not complying with this disclosure form.
Non-resident withholding tax
Non-resident withholding tax on gross rental income earned from the property is required to be remitted by the 15th of the month following the month of rental. The other option is to file an NR6 – Undertaking to file an Income tax return by a Non-Resident Receiving Rent from Real Property every year ,preferably before the first rental payment is received, in order to remit withholding tax on a netincome basis (revenues less expenses). If the taxpayer was not aware of the withholding requirements and did not remit the withholding tax, either on a gross basis or a net basis by the due date, CRA could assess as a penalty, the full 25% of the gross rent of the property.
Section 216 non-resident rental return
If the taxpayer withholds tax on a gross income basis, he has two years from the end of the year in which the rental income was paid to file a non-resident rental tax return (i.e. s.216 return). If an NR6 is properly filed, he has until June 30th of the year following the year of rental to file the non-resident rental tax return. If he files after June 30th, the penalty can be as high as 25% of the gross rental income of the property. By filing the NR6, the taxpayer is electing to file the s.216 return on time and if not, the penalty is severe.
Section45(2) election
The 45(2) election is an optional election that a taxpayer can file which prevents a personal property from being considered deemed disposed of at the time the taxpayer begins to rent the property, and deemed disposed of again at the time the taxpayer re-occupies the property. Whether a 45(2) election should be filed or not is beyond the scope of this article. However, if the 45(2) election is not filed by April 30th of the year following the year of change in use to a rental property, it can be late filed subject to the CRA’s discretion and a penalty of $100 per completed month that the election is notfiled, up to a maximum of $8,000. Many taxpayers are shocked to find that when they return to Canada to reoccupy the property, there is a deemed disposition and tax on a home they have not sold. In certain situations, the45(2) election may be a benefit, but the benefit would have to be weighed against the $8,000 maximum penalty.
T1135
Form T1135 – Foreign Income Verification Statement is required to be filed by Canadian residents or departing individuals who own certain property outside Canada with a total cost amount of more than $100,000 CAD at any time during the taxyear. By not filing this form by April 30th of the following year, the penalty accrues at $25 perday to a maximum of $2,500. This means that a married couple that has joint ownership in a property could be looking at a penalty of $2,500 each for not complying.
Voluntary Disclosure Program
As part of Canada’s pledge for tax fairness, the tax legislation provides the CRA with the ability to assess late filings on a discretionary basis without penalty under the Voluntary Disclosure Program. Therefore, if you have not been fully compliant with your Canadian filing requirements, you may in many cases still have the option of voluntarily submitting your outstanding filings with CRA without penalty. Certain criteria must be met in order to qualify for this program and CRA will have the discretion to determine whether the late filings meet them. However, interest charges may still apply.
These are some of the more common tax filings that are required when an individual leaves Canada and becomes a non-resident. If a tax payer finds himself in a situation like the one described above, he should try to take action before the April 30th filing deadline. If the April 30th deadline has passed, the taxpayer should contact a qualified accountant to determine if the CRA’s voluntary disclosure process should be initiated. Professional advice should be sought before acting on any information provided in this article.
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| Ernie Nagratha is a Tax Advisor with Trowbridge Professional Corporation, Chartered Accountants | Tax Advisors. The firm focuses on international tax services for Canadians around the world. For further information on the firm and the services it provides, you can contact Ernie.
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