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Income tax — liability of deceased's estate for UK pension income

My client's father had passed away in his 80s. In going through his father's papers, my client discovered that his father had failed to report a government pension from the UK for over 20 years on his Canadian tax returns. His returns were otherwise correct.

The potential risk was that the CRA would identify this problem and assess the deceased father's estate for 20 years of tax, interest and penalties — possibly a very large sum.

I filed a Voluntary Disclosure on behalf of my client, on a "no-names" basis. I explained that the deceased had filed Canadian tax returns and reported his income every year, but had failed to report the UK government pension income.

However, as I explained in the letter, there was no clear evidence of "carelessness or neglect" that would allow the CRA to go back more than 3 years. In the circumstances, it seemed likely that the deceased had innocently believed that his UK pension income was not taxable in Canada. As a result, I suggested to the CRA that it had no legal authority to reassess the deceased for more than 3 years. My client was however willing to pay the back taxes for 6 years plus interest.

The CRA's Voluntary Disclosure Officer replied that they would accept 3 years of the pension income being reported, with interest but no penalty. The officer agreed with my technical analysis showing that the CRA had no legal right to assess more than 3 years.

Problem solved for less than half of what my client was willing to pay!

(2011)