Taxpayer gets second chance

Readers will recall my repeated warnings about the severe penalties for failing to file Form T1135, the Foreign Income Verification Statement.

FormT1135 must be filed annually if the total cost of all your foreign investments, including foreign stocks (but not Canadian mutual funds with foreign holdings) held in non-registered Canadian brokerage accounts, is over $100,000. The penalty for failing to file this form is $25 a day, to a maximum of $2,500. If you knowingly, or under circumstances amounting to gross negligence, fail to file, the penalty jumps to $500 for each month the form is not filed, up to 24 months.

The CRA used to waive these penalties for first-time, non-filing offences, but has been assessing penalties on first-time occurrences.

I last wrote about this in January, when I discussed the recent Federal Court of Appeal decisions involving the Asper Group of companies. The Asper Group failed to file T1135 forms for six companies over four years. During each of those years, the Asper Group paid taxes on all foreign income.

They were hit with penalties for each company (for each year) along with interest, and appealed to CRA. When CRA refused, the Asper Group sought judicial review. The Federal Court Judge refused to send the matter back to CRA. The Asper Group unsuccessfully appealed that decision to the Federal Court of Appeal last fall.

Glimmer of hope

However, a tax case decided in March (Douglas v The Queen, 2012 TCC 73) may provide a glimmer of hope in cases where a taxpayer innocently files the T1135 late. The CRA assessed a $2,500 penalty on Bruce Douglas for failing to file his T1135 on time.

In 2008, he prepared his own income tax return, including Form T1135, which stated he owned real property in the U.K. valued between $100,000 and $300,000.

Because he was self-employed, the deadline for filing his 2008 tax return, as well as the T1135, was June 15, 2009. But he didn’t file it until March 2010, assuming this was acceptable if there was no tax payable. (His 2008 net professional income was only $865). As his T1135 was filed more than 100 days late, the CRA assessed the maximum penalty of $2,500.

In this case, the Judge took issue with the application of the penalty, since “Mr.Douglas took reasonable actions to comply with his income tax obligations.”

The Judge felt it was reasonable for Douglas to conclude that the income tax return could be filed late because there was no tax payable for the year, saying it would be “unfair to penalize Mr.Douglas for failure to comply with a filing deadline in these circumstances. […] Although the penalty [for late filing] is strict […] this Court has held that even strict penalties should not be applied if a taxpayer has taken all reasonable measures to comply with the legislation.”

As Douglas was “diligent in his compliance efforts, and acted reasonably and competently,” the Judge cancelled the penalty and awarded Douglas—court costs included.

This is a major victory and suggests some sympathy may be available through the court system. In cases of late-filed T1135s, your client should submit them under the CRA’s Voluntary Disclosure system to avoid penalties.

If your client has already been assessed a penalty, however, he or she can write to the CRA to request administrative forgiveness for the penalty assessed. But if the CRA turns that down, your client may face a better chance in the Tax Court, rather than Federal Court, fighting the actual penalty.

A decision to fight the penalty in Tax Court must be made by filing a formal Notice of Objection within 90 days from the mail date of the Notice of Assessment. Each case is fact-specific, so obtain legal and tax advice before challenging penalties.

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.