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It’s been two years since I wrote about the notorious, oft-forgotten Form T1135, the Foreign Income Verification Statement, and its filing requirements (“Remind clients to report offshore investments,” Advisor’s Edge Report, June 2016). But a new case released in March gives taxpayers who may have forgotten to file the T1135 hope for potential relief from harsh late-filing penalties.

Requirement to file

You’ll recall that if a taxpayer owned foreign investments with total cost exceeding $100,000 at any point in 2017, they were required to file the form by April 30, 2018. (If your client—or their spouse or partner—was self-employed in 2017, they have until June 15 to file.)

Penalties for filing Form T1135 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 the “innocent” non-filing of the form. Yet, despite all the reminders, another T1135 case may give delinquent filers in similar circumstances some hope.

The case

The latest T1135 case (Takenaka v AGC, 2018 FC 347) involved Yoshimi Takenaka, who went to Federal Court seeking a judicial review of a decision by the Canada Revenue Agency partially denying her request for relief from a late-filing penalty (and associated arrears interest) for 2011. (Her request for relief for the 2012 tax year was granted.)

Takenaka, a homemaker, moved to Canada with her husband and three children as a permanent resident in August 2009. She and her husband jointly own a rental property in Michigan, which was their family home before moving to Canada. Because of the home’s value, part of which is attributed to her, they were both required by tax rules to file T1135 forms. Her husband knew to file his own T1135 with his tax returns for the years in question, including the rental income from the rental property in his gross annual income.

Prior to 2013, Form T1135 stated, “Complete and file this statement with your tax return.” Takenaka therefore believed the filing requirement didn’t apply to her because, as a homemaker, she had no taxable income in 2011 and 2012 and was therefore not obligated to file a tax return. For the 2013 tax year, the T1135 was revised. The form’s new version dropped the reference to filing the form “with your tax return,” likely as a result of the confusion it caused in other T1135 cases.

In 2014, Takenaka decided to file a 2013 return to claim the former Canada Child Tax Benefit (now the Canada Child Benefit). She also filed returns for 2011 and 2012 at the same time, since the CCTB could be claimed retroactively. Along with her returns, she filed the T1135 form for each year.

CRA then sent her notices of assessment for the 2011 and 2012 tax years, assessing the full late-filing penalties of $2,500 per tax year, plus interest, for a total of $5,541 in penalties and arrears interest.

Takenaka applied to CRA for taxpayer relief based on “financial hardship/inability to pay” and the “inappropriate application of the rules and penalties associated with failure to file T1135.” She explained that because she was not required to file a tax return, she didn’t think she was required to file the T1135. Furthermore, she stated that there was no intention to conceal the information from CRA, as her husband had filed the T1135 forms and the agency clearly was aware that they owned the property. In addition, she pleaded financial hardship as she has no income and therefore was unable to pay the penalty.

On Feb. 24, 2015, CRA denied Takenaka’s request. She filed a second-level relief request, which was considered by a different processing officer who granted partial relief, cancelling the 2012 penalty but maintaining the 2011 one.

The judge reviewed all facts and circumstances and concluded that CRA’s second-level decision not to grant full relief for the 2011 tax year was “unreasonable”for a variety of reasons, one of which was that the agency failed to address the taxpayer’s inability to pay due to financial hardship. The judge therefore ordered the matter to be sent back to CRA for reconsideration by a different officer.

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

Originally published in Advisor's Edge

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