Is there any restriction/conflict to keep both of clients who are separate? They changed their status with CRA by themselves. Is there a time limit they can keep their status as separate
A client will be separated until one of two events, generally (there is a third, but it’s terminal…):
- they get a divorce decree
- they begin living with someone else for the requisite length of time in which case they become “common law” - at least for tax purposes, and possibly legal ones as well
I was “separated” personally for around 11 years until my ex decided she wanted a divorce and was willing to pay for her share (I wasn’t, not surprisingly).
As far as keeping both parties as clients, I have done so many times over 40 years in tax. I tell them one thing: “When it concerns dealings between the two of you, I will tel you each exactly the same things. If that’s OK, sign here…”. I don’t play favourites and I don’t cheat. If I can’t do that, I tell one (but usually both) to go find someone else.
To be fair, the vast majority of my clients are very long-term, so I’ve dealt with many for over 20 years. They understand. (I might not do that for a new client…)
They should really have a written agreement dated and signed.
Is there any onus on me if I “feel/suspect” that they might not be separate, though one is living outside of Canada? Am I suppose to judge their relationship or I’m getting too far?
“They” may or may not have done that correctly, or may or may not be treating it correctly.
Even if you were sleeping on the floor of their bedroom you would not know just from hearsay.
In general, you need a copy of the written separation agreement, signed by both parties (preferably prepared by a legal professional) and/or other evidence of their living arrangements / address.
Also, it sounds like you may have a tax treaty issue with one of the parties as to tax residence / tax emigration.
People have many many misconceptions, and will tell you their guesses at pretty much everything they don’t understand well - go only what by what you have in authorized writing or by court order.
Written agreements are nice in theory…but I’ve seen them seldom over the course of my practice. When couples separate there is often no desire to do any “work” in papering it, unless children are involved, and even then, not until the emotions chill enough to talk .
If you suspect an issue, ask for documentation from third parties or an agreement signed by both or properly prepared…and if that is not available, at least a written statement from your client as to the situation.
Once you have exhausted a “reasonable amount of diligence”, you are likely “reasonably” safe. The question really is…“If they’re lying what are they gaining”? If there is no tax difference one way or the other it’s pretty much “No harm, no foul”. Even if there is a difference, it’s not yet really established law as to how much diligence you, as the tax preparer, really need to exercise.
In my opinion, your job is to prepare an accurate return in the circumstances, not to break the law while doing so or allow/enable others to do so where it would be “reasonable” to conclude that they are indeed doing so.
Good judgment saves a lot of heartache! Exercise it well in tricky situations (it happens to all of us, in many different ways…pretty much all the time).
And, as always, my thoughts, not legal advice!
“The question really is…“If they’re lying what are they gaining”?”
" though one is living outside of Canada?"
By mistake or whatever, one example “gain” could be for the “living outside of Canada” person to fail to report worldwide income on a Canada tax return…
KYC and copies of documentation keeps you safe…
This exactly my feelings are. I’m doing their taxes for the first year and I’ve no authority to challenge their status as they support by backing up the current status with CRA. I don’t want to play ‘Sherlock Holmes’ yet inclined to satisfy professional ethics
It is a thorny area…and there is an excellent discussion on the third-party penalties here by a noted tax lawyer:
If there’s one thing that is true in tax, it’s that there is very little (other than a basic situation) that is black or white…and a whole lot of grey. Each practitioner needs to decide for him/herself in each fact situation how to respond, document or walk away.
When doing US tax returns, and claiming certain refundable tax credits such as ‘Earned Income Credit’ and ‘Child Tax Credit’, there is a ‘Due diligence’ questionaire to be completed by the return preparer. This questionaire really focuses on knowledge of client, checking their ID, etc.
So yes, there you do have to ask thorny questions…
They seem to think that because one lives outside the country that means they are separated.
Unless they intend to end the relationship permanently, they are still married. Think of all the military families where one is deployed overseas. They are still married despite the sleeping arrangements.
You MUST ask the thorny, uncomfortable questions in order to make sure they are not trying to gain extra credits (eligible dependant, child tax, etc) when they in fact have no intention of ending the marriage. I run into that a lot here on the Lower Mainland with the high immigrant population.
You have to be careful in asking that you don’t let on that you are making sure they aren’t cheating the tax system though. A few “Does he come visit the kids?” “How often does he return to Canada?” “Do you see him when he’s in Canada?” can start the conversation and sometimes give very telling responses.
Any doubt about their story - ask them to go elsewhere. The minimal revenue from a T1 engagement just aren’t worth the risk.