A happy ending for another Form T1135 debacle

It’s been over a year since I wrote about the infamous Form T1135 Foreign Income Verification Statement and its filing requirements (see Advisor.ca/T1135). Since then, a new case is giving renewed hope for potential relief from the harsh late-filing penalties to taxpayers who may have been delinquent in filing a T1135.

Requirement to file

Clients who own foreign investments whose total cost exceeded $100,000 at any point in a tax year are required to file Form T1135. The form covers obvious things, like a U.S. rental property or funds in a Swiss bank account, but it’s also required for foreign stocks held in a Canadian, non-registered brokerage account.

Excluded are foreign securities held inside pooled products, like Canadian mutual funds, or inside a registered account like an RRSP, RRIF, TFSA, RESP or RDSP. Property for personal use, such as a vacation home that’s not ordinarily rented out, is also excluded.

The penalty for late filing is $25 per day to a maximum of $2,500, plus arrears interest.

The latest T1135 case

The CRA has issued a penalty to taxpayers for what could be considered the innocent non-filing of the T1135 in more than a dozen cases. The latest (Moore v the Queen, 2019 TCC 141) involved a Montreal employee of GE Capital Canada from 2003 to 2016. While employed at GE, the taxpayer took advantage of its employer-sponsored share purchase plan to acquire shares of GE Canada’s parent, a publicly traded U.S. corporation. He acquired the shares gradually via bi-weekly payroll deductions with matched funding from his employer.

In March 2016, GE Capital Canada was acquired by Wells Fargo Canada, where the taxpayer continues to work, but this ended his participation in GE’s employer-sponsored share purchase plan. The taxpayer was given the option to either sell his shares or transfer them to a Canadian brokerage account, and he did the latter.

It was only after this change that he realized he should have started filing a T1135 form in 2015, because the aggregate cost of his GE shares in the plan exceeded $100,000.

The evidence before the Tax Court showed that all the dividends received up to that time were properly reported in his tax returns. As the judge commented, “There is no suggestion that any employment benefit from the acquisition was not also properly reported.”

Shortly after the taxpayer filed his 2016 return, he wrote to the CRA to inform the agency of his failure to file the form for 2015. He completed and submitted T1135 forms for both 2015 and 2016, and has continued to file them since. The CRA, apparently not satisfied that the taxpayer had voluntarily come forward to report his foreign property, slapped him with a $2,500 penalty for not filing his 2015 T1135 on time.

The judge observed that the taxpayer “was not cavalier about his income tax obligations.” The taxpayer had reported all benefits and income he received on the shares and paid tax on those amounts. “No amount was misrepresented, mischaracterized or omitted in his 2015 tax return,” the judge said.

While one might have thought that the CRA would automatically forgive any penalties for late filing if a taxpayer comes forward to correct their return, that is not the case. The agency requires this type of disclosure be done under its formal Voluntary Disclosure Program in order to get the penalty waived.

The judge suggested the matter would never have gone to court if the taxpayer had chosen to let bygones be bygones, skipped the 2015 filing and started filing the form in 2016, rather than alerting the CRA that the $100,000 threshold had been triggered in 2015 and filing the 2015 form late.

In the end, the judge ordered the penalty to be cancelled and he posed, in his words, a “rhetorical question.”

“Is [the taxpayer’s] disclosure to CRA on a voluntary basis of his failure to file a 2015 information return not the type of compliance effort CRA wants to encourage Canadians to follow?”

Jamie Golombek , CA, CPA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning and Advice in Toronto.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.