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 Advisor to Client (Keyword) 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.
Need ideas to get the conversations started with investors?
Originally published in Advisor's Edge Report
Read this article and full issues on the iPad - click here.