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.