Cases of late T1135 forms are back in the news
This past fall saw the release of six Federal Court of Appeal decisions (Stemijon Investments Limited v. A.G. Canada, 2011 FCA 299), involving the Asper Group of companies and their ongoing tiff with the Canada Revenue Agency over egregious penalties charged for the late filing of Form T1135, the “Foreign Income Verification Statement.”
I’ve written about this topic before (see AER, “Pushing the tax deadline”, April 2010), yet taxpayers continue to face reassessments for unknowingly not filing the form on time, notwithstanding all their foreign income was fully declared and taxed on personal tax returns.
As a reminder, Form T1135 must be filed annually if the total cost of 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 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.
The CRA used to waive penalties for first-time offences. Over the past few years, the CRA changed its administrative policy and has been assessing penalties even on first-time occurrences.
The Asper Group failed to file T1135 forms for six companies over the course of four years, until the CRA asked it to do so. The Group’s troubles began in 2000, when its accounting firm incorrectly concluded T1135 forms were not required where an investment portfolio was managed by a Canadian investment manager and subject to Canadian tax-reporting requirements.
As a result, the Group stopped filing the forms beginning 2000 until the CRA asked it to in 2005, for the 2000 to 2003 tax years. It should be stressed that during each of these years, the Asper Group fully reported and paid tax on all foreign income.
The cases were first heard at the lower Federal Court in September 2010 (see AER, “A late T1135 can be costly,” October 2010) when the companies sought a judicial review of the CRA’s decision to deny their request for relief from penalties and arrears interest. The Court had to decide whether the CRA’s decision not to forgive penalties and interest was reasonable.
The judge found the CRA acted within its bounds to deny relief. The Asper Group found itself in the Federal Court of Appeal (FCA) this past October, requesting a review as to whether the lower court was correct in dismissing the Group’s application for a review of the CRA’s decision.
In an interesting and unusual decision, the FCA first concluded the CRA’s decision “falls outside the range of defensibility and acceptability and, thus, is unreasonable” because it relied solely on the CRA’s published administrative policy as to when to grant relief.
Specifically, the policy, as published in CRA’s information circular, states relief can only be granted if:
- Penalty or interest arises from extraordinary circumstances;
- Penalty or interest is due to actions of the CRA; or
- Taxpayer can’t pay the amount owing.
The FCA said the CRA should instead be basing its relief decision on the Income Tax Act, which gives the CRA complete and unfettered discretion to cancel interest and penalties, and is not limited to the three scenarios in its information circular.
However, the FCA went on to state that despite the CRA’s unreasonable decision, “there would be no practical end served in setting aside the [CRA’s] decision and returning the matter to [the CRA] for redetermination” since the CRA could not reasonably grant relief on these facts.
The Court of Appeal further found the “excuses and justifications offered by the [Asper Group] for delay in filing […] have no merit” and asking the CRA to reconsider would be “an exercise in futility.”
The Asper Group also argued it was unfair to levy six separate, sizeable penalties against the companies when there was really only one mistake made by their accounting firm. The Group wanted the penalties substantially reduced.
The FCA said this argument had no merit, “smacking of a plea for a volume discount.” Since each company was a separate legal entity and taxpayer—potentially subject to penalties and interest for its own non-compliance—each should have been capable of independent decision-making concerning which forms needed to be filed.
As advisors, while we wouldn’t be liable for penalties and interest our clients may face upon late filing of a required Form T1135 (unless we were involved in their tax return preparation), it would be greatly beneficial to ensure they (and their accountants) are aware of the potential need to file the Form if their non-registered foreign holdings exceed $100,000 on a cost basis.