While servicing Canadian expatriates, my colleagues and I have come across various similar situations that pose a problem when a taxpayer either does nothing with respect to their departure year tax filings or files incorrectly. A common example occurs when a taxpayer 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.

Assume the taxpayer 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 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 of the detailed mechanics, what filing requirements the taxpayer has, and the penalties for non-compliance, that the Canada Revenue Agency (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 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 30 that carry separate late filing penalties not related to the tax owing on the taxpayer's return. The application of penalties by the CRA for non-compliance can be strict.

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 the individual 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 30 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 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