Why to report foreign investments

Regular readers of this column are familiar with my repeated warnings about the severe penalties for failing to file Form T1135, the “Foreign Income Verification Statement.”

Form T1135 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 is $25 per day, to a maximum of $2,500. If you knowingly or under circumstances amounting to “gross negligence” fail to file the form, the penalty jumps to $500 for each month the form is not filed, to a maximum of 24 months.

Canada Revenue Agency used to waive these harsh penalties for first-time, non-filing offences. But it has changed its administrative policy and is assessing penalties even for first-time offenders.

Douglas v The Queen

I last wrote about this issue in April 2012, (see “Taxpayer gets second chance,” AER April 2012). I discussed the case of Bruce Douglas (Douglas v The Queen, 2012 TCC 73). He was assessed a $2,500 penalty for not filing his T1135 on time.

The judge took issue with the penalty because “in this case… Mr. Douglas took reasonable actions to comply with his income tax obligations.” The judge felt it was “reasonable for Mr. Douglas to conclude that the income tax return could be filed late because there was no tax payable for the year.”

The judge said 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 the T1135] 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.”

Edwards v The Queen

This is the first case where a taxpayer attempted to use Douglas’s victory to avoid penalties for a late-filed Form T1135. It was decided in December 2012 and involved Fiona Edwards, who was assessed a penalty of $2,500 for each of her 2005, 2006 and 2007 tax years. The forms were due on April 30 following each taxation year; she filed in September 2009.

On the forms Edwards indicated she owned real estate outside of Canada in the years in question, the total cost of which exceeded $100,000. She reported foreign rental income on her tax returns.

Relying on the Douglas decision, the accountant who represented her tried to argue that she was either not a resident of Canada in the years in question (the Court found her to be resident) or that, if she was resident, she “exercised due diligence during the relevant period in failing to file form T1135 within the prescribed time period.”

Due-diligence defence

The judge distinguished Edwards’s situation from the Douglas case, saying she “has not provided any evidence to show that she exercised due diligence.” Edwards filed Canadian tax returns in 2003 and 2004. In 2005 she decided — without seeking professional advice — she no longer needed to file.

The judge wrote: “It is my view that a reasonable person in such circumstances…would, at the very least, have consulted a tax advisor with respect to her income tax return for 2005.” Edwards’s appeal was dismissed and the three late-filing penalties upheld.

The case serves as yet another reminder of how important it is to file the T1135. We need to make sure our clients are fully aware of the consequences of being even a day late.

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.