baconsandwich

I have a few questions regarding my situation... I'll try to make this as clear as I can!

I left the UK to live in Canada in summer 2005. I didn't know then that I was going to stay for good, so I didn't tell HMRC about leaving (I presume this would've been through form P85). The plan was to be away for a year. I was reporting (through self-assessment tax return) income from a rental property and paying tax and making NI contributions monthly, as I used to be self-employed in the UK and this payment was set up as part of that. I am still making the NI payment to this day.

I became a Canadian citizen this year and will be staying in Canada permanently. I no longer have any UK income.

I would like to tie-up my tax affairs in the UK; I don't want to have to deal with a self-assessment tax return every year, and would rather the HMRC officially consider me non-domiciled in the UK (which is true!). Obviously this means completing form P85, but as I left 9 years ago, I have no idea which date I should give them for leaving. I'm now concerned that this will open a huge can of worms and I'll suddenly owe them tax. I prefer to be open and transparent about these things, but it's become a worry.

I have worked in Canada and been a tax resident since 2005, and the only income in the UK which was reported (on which I paid tax) was the rental income. I did not report UK income in Canada at all, and did not report Canadian income on the UK return. No need to tell me this was wrong; since I consider that I paid tax in both countries on what was due (and that there is a treaty to ensure no one pays double tax), surely I won't owe anyone... True?

Any help would be enormously appreciated! Thanks in advance.

Aviator

Not necessarily as your tax is based on your marginal rate on your world income. Combining your UK and CAD income may push you into a higher tax band.

If you owned assets outside of Canada valued at over $100,000 CAD you should have been filing a T1135 ( You say you had rental property) T1135 - Foreign Income Verification Statement Penalties for not filing are quite high and CRA get pretty strict on this. If you have sold your rental proeprty there may be CGT to pay on that as well. The prevailing FX when you became tax resident and when you disposed of property has an impact as well.

You should gather all you paperwork and go straight to an accountant and file adjustments to CRA before they come knocking.

As far as the P85, no idea on that.

JAJ

Completion of P85 is not mandatory. HMRC should be aware of your status since you completed U.K. tax returns as a non-resident.

Whether you have become non-domiciled is a question of fact, not whether or not you have completed any particular form. Have you done any research on what it takes to become non-domiciled?

How did you end up paying tax in the U.K. on rental income? Very unusual for a single rental property, due to the personal allowance.

And you should have paid tax in Canada on worldwide income, and taken a credit for any U.K. tax, if any. Not sure what you were thinking when you didn't put it on your Canadian tax return, did you not understand that worldwide income in Canada is taxable?

Steve_

The tax treaty between the UK and Canada means they can access each other's records, so you may find you don't have much of a choice but to 'fess up.

If CRA will let you retroactively file a T2209 going back that far it's not an insurmountable problem. On the UK side you should have said you no longer reside in the UK but you in fact did not reside in the UK, as JAJ pointed out, this is a fact, so it's not that important. As a non-resident you would still have paid tax on the rental income at the same rate so it's more of a bureaucratic thing from the UK side of it, it's just a change in what your reporting status was during those years.

The problem is on the Canadian side, because you should have included that income on your Canadian return and claimed a foreign tax credit for the UK tax that was paid. As mentioned, this may push you into a higher tax band in Canada so it's almost certain the rate of tax is higher than what you paid on that amount in the UK so in other words you owe the CRA money.

How much you owe depends on how much the income was and if you can claim the foreign tax credit retroactively (which means a T1 adjustment and a T2209 for those tax years). And whether the CRA will assess penalties.

I think you need to talk to a specialist accountant really who has some experience of what the CRA might do, rather than calling the CRA out of the blue. What the CRA normally does is to send you an NR74 for the year you arrived, then based on that if they decide you were resident they'll contact HMRC, work out how much tax and penalties you owe on the reported amounts and then send you a bill.

Souvy

Maybe even a tax lawyer?

The T1135 is a worry. I got done on it a couple of years ago. The form was in my return but my accountant and I had both failed to notice that we hadn't ticked a box. I got a letter some months later that I had not filed on time because my return was incomplete. I owed them money that year.

I think it cost me $1,500 in penalties and interest.

Steve_

Jesus, I assume you tried arguing them out of it?

Yeah he's going to get hit with Canadian CGT on the sale as well. Hope for his sake the property was valued at less than $100,000. Because that's a lot of T1135s that haven't been filed otherwise.

I'm so sick of T1135, the CRA lost my last one, so I had to refile it with the office in Ottawa (this was after the agent phoned me up to ask why I hadn't filed it), so this agent was very apologetic and I got a letter last month saying they'd found it and sent it on to Ottawa.

I've actually restructured my investments so hopefully I won't have to file it anymore.

baconsandwich

Thanks for replies so far. Much appreciated.
Will write a longer response later, but regarding the value of the property, it was a 'shared ownership' property so the amounts we're talking are lower than usual.

The share was purchased in 2004 for £66250 and sold in 2014 for £82500. It was held in joint ownership with my ex-partner so I'm assuming for tax purposes I should halve these amounts. Even at the highest exchange rate over those years ($2.21 annual average), that means the value never went higher than $74000.

Also, with regard to CGT, I also assume the difference in those values is what I would be taxed on, correct? Meaning the difference is £16250, CGT in Canada being taxed on half that, so it's £8125. Joint ownership means my half is £4060. Sound right?

Sounds like I've been non-resident from the UK long enough that I won't pay CGT there.

Keeping my fingers crossed about all this.

Steve_

Yeah the UK is not really an issue (unless they decide you were factually resident, but you weren't, so not an issue), there was no CGT for non-residents on real estate until recently. It's the CRA where the problem is.

The question is what you do next, because the more you poke the CRA the more likely they are to get in touch with HMRC and look at your UK tax records.

The whole raison d'etre of the CRA always seems to me to be to stop Canadian tax revenue going to the US so they're quite keen on collecting tax on foreign income.

It sounds to me basically like you owe back income taxes and some CGT and the penalties on it and the amounts sound quite small (i.e. the penalties won't be crazy) so it's not something to get desperately worried about.

baconsandwich

As I dig into this, it's sounding less worrying! The amounts of rental income aren't huge, but could result in taxes being owed, I guess. The highest the rental income ever got in any one year was around $9000. (That equates to my half of the income).

If I paid UK taxes on the income, would I still owe the CRA?

JonboyE

Generally, you would owe the CRA the difference (if any) between the tax due in Canada on the income and what you have already paid to HMRC.

Looking at your figures there was a 2.2% compound annual increase between 2004 and 2014. This would put your share at £33,854 in 2005. The exchange rate mid 2005 was 2.1973 putting your tax cost in Canada as $74,387. Mid 2014 the exchange rate was 1.8261 so your share of the sale proceeds was worth $75,326. These are ball park figures but your gain is less than $1,000 and, depending on province and other income the tax due will be around $200. In reality, property prices were probably rising at a greater rate than 2.2% in 2004/2005 so you may have no gain at all.

If you filed your returns on time the years up to 2010 are probably statute barred now.

baconsandwich

Thanks @JonboyE. I've emailed you to find out how long it'll take to prepare paperwork to fix the mess I created.

Just to confirm, I've filed all my returns to the CRA on time since arriving.

Souvy

I tried to argue but got nowhere. The lack of a tick in a box rendered my return incomplete and thus not filed.

The most annoying thing was than the intransigent ratbag I spoke to at the CRA was a bloody Brit!

The other form to watch out for is the Foreign Income Verification Statement. The CRA is hot on that one, and on foreign tax credits. I've been audited twice on that.

Geordie Lass

Will you please move to Calgary JonboyE? My life would be easier if you were my accountant.

Souvy

Why would he need to? I have never met or actually spoken to the accountant who did my returns this year. Everything was done by email.

Geordie Lass

I run my own business so have receipts etc that need to be handed over.

I prefer to do things in person.

Mine gives me hard copies of the returns. Doesn't yours?