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.