Testing of T1135 penalties continues

This article appears in the February 2020 issue of Advisor’s Edge magazine. Subscribe to the print edition or read the articles online.

The notorious Form T1135 Foreign Income Verification Statement continues to cause problems for taxpayers who fail to file by the deadline.

Taxpayers who owned foreign investments with total cost exceeding $100,000 at any point in 2019 are required to file Form T1135 by April 30, 2020 (June 15 for the self-employed). Penalties for filing the form late are $25 per day up to a maximum of $2,500, plus arrears interest.

In more than a dozen cases, taxpayers have been assessed the full penalty for what could be considered innocently not filing. Last year (see Advisor.ca/newT1135) I wrote about a Tax Court judge ordering a Canada Revenue Agency (CRA) penalty be cancelled. The most recent case was decided in November.

The case

Chen v AGC (2019 FC 1435) involved a New Brunswick taxpayer who went to Federal Court seeking a judicial review of a CRA decision. The agency twice denied her requests for relief from nearly $1,300 in penalties and interest for filing her Form T1135 49 days late in 2015.

The taxpayer owned foreign property during the 2015 tax year with a cost amount of more than $100,000, so was required to file the T1135. In June 2017, the CRA assessed a late-filing penalty because she submitted her Form T1135 for the 2015 tax year on June 22, 2016; it was due on May 2, 2016. (In 2016, the normal due date of April 30 fell on a Saturday, and thus the deadline was extended to the next business day.)

The penalty was calculated as $25 per day times 49 days ($1,225) plus $72.42 arrears interest, for a total of $1,297.42.

The taxpayer filed a taxpayer relief request under the Income Tax Act in November 2017, which allows taxpayers to seek discretionary relief from late-filing penalties and arrears interest. In her submission, she stated that she filed late because she was away from her hometown of Fredericton from February to May 2016 and didn’t have the necessary documents to file on time. Upon her return, she filed her Form T1135 together with her T1 income tax form. She didn’t owe any tax for 2015.

On Oct. 16, 2018, the CRA informed the taxpayer that her request for relief was denied. The decision said “the circumstances weren’t beyond the [taxpayer’s] control and [she] was responsible for making her own arrangements to ensure she met her filing responsibilities,” the decision said.

Unhappy with this result, the taxpayer requested a second-level review for relief. In that request, she raised a new issue, claiming she had called the CRA’s individual tax inquiries phone number in either February or March 2016 and was told she could file a tax return late as long as she “had no tax owing.” Relying on this information, she filed her Form T1135 late.

The CRA denied the taxpayer’s second request for relief because, in 2014, the taxpayer had also been assessed a penalty for filing her form T1135 late. Therefore, “she would have known about her filing obligation for the 2015 form,” the decision said. (The 2014 penalty was waived.)

The CRA went on to explain that, even without having all her documents, she could have filed an estimated Form T1135 and amended it once she had her documents. For these reasons, she was denied relief.

The taxpayer, feeling that the CRA didn’t properly exercise its discretion to waive her penalties and interest, applied to the Federal Court for a judicial review of the CRA’s decision. The case was heard in Fredericton in November 2019, with the issue before the court being whether the CRA’s decision to refuse the taxpayer’s relief request was reasonable.

The Federal Court’s decision

The taxpayer argued that the CRA was partially to blame for her late filing since the agency “misinformed her about whether there would be a penalty.” She had called the CRA and asked about the consequences of filing her T1 tax return late, and had relied on the advice given over the phone that she wouldn’t be assessed a penalty if she filed late and didn’t owe money.

The judge didn’t buy that argument.

When the taxpayer called the CRA, the judge said, rather than asking about the T1 return, she could have asked about the treatment of a late T1135. She then would have been advised that filing the T1135 late would incur a penalty whether or not she owed tax for the year.

The judge concluded that it was “reasonable for the CRA not to grant a waiver of the penalty for the late filing of the same form two years in a row. […] Given that she […] applied for and received penalty relief just the year before, this should have illuminated to her the importance of filing the T1135 on time because she had the teaching moment the year before.”

Taxpayers continue to be penalized for filing Form T1135 late. While some have managed to reverse CRA penalties in court, such an outcome isn’t guaranteed.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at 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.