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British Pension not claimed

#1

Hi there,
I have a new client who has been receiving a pension from the UK for at least 10 years. He hasn’t reported it on his T1 because he was told that if the money stays in his UK bank account, he doesn’t have to report it as income. He plans to have the pension transferred over to his Canadian bank account this year.

Could anyone please comment?

#2

Don’t know who told him that but it is taxable when he receives it regardless of where the bank account is located. You can either amend all his returns to report the pension income (and associated tax credits if any) in the proper years or claim it all this year which will result in higher taxes (all at highest tax bracket) but avoid any late filing penalties if the earlier returns were not filed on time. If there was tax withheld on it however it must be claimed in the proper year as the CRA will not allow any foreign tax credits that were not paid/accrued in the year claimed.

#3

He should consider a Voluntary Disclosure and declare all that he has not for the last 10 years. I had a client who did this years ago because he did not want to die and potentially leave his wife with the problem.

#4

I ASSUME from the question that he is resident here, and has been for all of those 10 years? If not he needs to figure out the tax liability for the jurisdiction(s) he was resident in. If he was resident here he needs to report his world wide income here… so I’d ask him if there is any other income that he has in other countries as well so that you can make sure his filings are complete!

Based on the assumption of residence:

To start with, you will want to find out if the UK has been withholding tax on the amount. None of my clients with UK pensions have withholding taxes deducted before payment (including my mom). If he is he may claim it against his pension income since we have a tax treaty with the UK.

Then I would suggest doing a proper Voluntary Disclosure. They are a bit of work, but will protect your client from the penalties for non-reporting. He’ll still owe the tax and interest, but there shouldn’t be any penalties. If it was just a year or two I would just T1ADJ and get it over with, but given the time frame, even if he only gets a few thousand dollars a year in pension it could be $30,000+ in unreported income. The penalties could add up. From the CRA site: " Repeated failure to report income penalty

If you failed to report an amount on your return for 2018 and you also failed to report an amount on your return for 2015, 2016, or 2017, you may have to pay a federal and provincial or territorial repeated failure to report income penalty. If you did not report an amount of income of $500 or more for a tax year, it will be considered a failure to report income.

The federal and provincial or territorial penalties are each equal to the lesser of:

  • 10% of the amount you failed to report on your return for 2018
  • 50% of the difference between the understated tax (and/or overstated credits) related to the amount you failed to report and the amount of tax withheld related to the amount you failed to report"

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html

Good luck!

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#5

Thank you all for replying so quickly. This will obviously have to be dealt with AFTER the tax deadline.

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#6

What jglass said…

BUT ALSO
Note “voluntary disclosure”:will not work if CRA starts investigating first…

That taxpayer needs to be the first to disclose…

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#7

unless you are SNC Lavelin…

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#8

I would report for 2018. Then complete a Voluntary Disclosure for the prior 9 years.

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html

You may consider engaging a Tax Lawyer to negotiate a settlement and and waiver of Gross Negligence Penalties.

This is but one such Tax Law firm.
http://barretttaxlaw.com/voluntary-disclosure-program-vdp-tax-amnesty-faq/

#9

And make sure he goes after the fool that told him it was tax free as long as it stayed in a UK bank account to pay any penalties and for sure for all the interest he gets charged.

This “tax preparer” is someone who is clearly breaking the law and needs to be reported. How many other people is he telling this nonsense to?

#10

That “fool” may have only been talking about the UK taxes…

What I usually see is what someone said, what someone heard, and the truth. The three are usually not the same.

Wish you the best @offsite in resolving this. For a first offense and if the disclosure is fully clean, you should not have problems. If there are other items in the background, the CRA will find them, so have a good talk with your client. (After tax season!)

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