Many immigrant clients incur penalties for accidentally disobeying tax laws. When that happens, they may blame you, so learn the common errors.
Two main situations require Canadian residents to file foreign tax returns:
- If they’re U.S. citizens (or travel enough to the U.S. to be residents for tax purposes). The U.S. is the only major jurisdiction to base taxation on citizenship, not residency
- If they have income, such as rent, from foreign sources
Always ask whether clients spend time beyond Canada’s borders. If so, find out if they earn money or draw benefits from that country.
Then, “review the tax treaty between Canada and the origin country,” says Robert Keats, RFP, president of KeatsConnelly, a cross-border wealth management firm.
With more than one million Americans in Canada, you’ll likely cross paths with a client who must file U.S. tax returns. For others, common sources of foreign income are pensions and rentals. Banks and governments normally withhold tax on these payments.
As long as the tax is withheld at the treaty rate, “there’s generally no obligation to file a foreign tax return,” says Terry Ritchie, a cross-border tax expert.
“But if you’re renting out real property, you have to report the net rental income.” (The same applies for other income paid directly.)
If a taxpayer doesn’t declare that income, CRA imposes 25% withholding tax on the gross rent, instead of letting her deduct property tax, insurance, utilities and other expenses.
Another reason to be proactive is the harsh penalties imposed on evaders.
“You file returns because the alternatives are worse,” says Kevyn Nightingale, leader of the expatriate tax practice of MNP in Toronto.
If the complexity of cross-border taxes doesn’t convince you to get help, the liability factor will.
Preparers of U.S. tax returns are subject to the same or higher penalties as taxpayers for underreporting income.
Even though other countries’ requirements aren’t as stringent, still ask cross-border tax experts and international planning lawyers for help.
“I would never do another country’s tax return [outside the U.S.],” says Joanne King, a U.S. tax associate at BDO. “I would refer clients to someone with that expertise and coordinate the preparation of the two returns to avoid double tax.”
Steve Harding, an estate-planning expert with RBC Wealth Management in Toronto, says his advisors insist clients obtain tax opinions before proceeding.