If you’re a resident of Canada and you own specified foreign property that has a total cost value of $100,000.00 or more at any time during the tax year, then you are required to report this to the CRA on a T1135 Form (Foreign Income Verification Statement) when you file your tax return, even if you have no foreign income or tax to pay. The penalties for failing to file are pretty steep.They apply even if you were unaware that you were supposed to file. In this post, I give you four tips on how to avoid the failure to file penalties and what to do if you are assessed penalties by the CRA.
What are the penalties?
The penalty just for failing to file on time is $25 per day, with a minimum of $100, and a maximum of $2,500.00.
Where the failure to file is done knowingly or under circumstances amounting to gross negligence, the penalty is $500 per month for up to 24 months (maximum $12,000), less any penalties already levied.
Where a demand to file a return is issued and the person or partnership knowingly or under circumstances amounting to gross negligence fails to comply with the demand, the penalty is $1,000 per month for up to 24 months (maximum $24,000), less any penalties already levied.
After 24 months, the penalty becomes 5% of whichever of the following resulted in a requirement to file the T1135, less any penalties already levied: the cost of the foreign property; the fair market value of the property transferred or loaned to the trust; or the cost of the shares and indebtedness of the foreign affiliate.
In addition, gross negligence penalties or a penalty for false statements and omissions can be applied. Those penalties are the greater of $24,000 or 5% of the event leading to a requirement to file as discussed above.
These penalties apply for each tax year. So if you have multiple tax years where you failed to file, your (re) assessment is going to be very high indeed. I have had high net-worth clients who have been assessed penalties of over $ 1 million.
Steps You Can Take To Avoid the Penalties
There are a few steps you can take to avoid or minimize the penalties for failing to file a T1135 information return.
Step #1. This one should be obvious. File your T1135 by the due date for filing your tax return. If you file on time, then the CRA cannot assess you a late filing penalty.
Step # 2. If you have missed the deadline to file the T1135 but the CRA doesn’t know about it yet, then you can file late under under the Voluntary Disclosure Program (“”VDP”), often referred to as a “Tax Amnesty”. If you make a VDP application, then CRA will most likely waive the penalties.
For an explanation of how the VDP program works read my earlier blog post found in the link below.
Click here to read how the VDP program works
Step # 3. If CRA has already assessed you penalties, then you should appeal the assessment by filing a Notice of Objection within 90 days from the date stated on the Notice of (Re)Assessment. This is done by submitting a letter to the CRA Appeals Division objecting to the assessment and setting out the facts and reasons stating why you disagree with the assessment and why you think that you shouldn’t have to pay the penalties. The CRA has a Notice of Objection form on their website but you don’t have to use their form. You can just write them a letter.
Click here for the CRA’s Notice of Objection form
Step # 4. If the Appeals Division rejects your appeal, then you should file a Notice of Appeal in the Tax Court of Canada. There is a little known “judge-made” due diligence defence where the Tax Court has allowed the taxpayer’s appeal and set aside the penalties. See the recent case of Moore v. The Queen (2019) TCC 141, for example. In that case, Mr. Moore was approximately a year late before he realized that he had to file a T1135 to report some US shares that exceeded the $100,000.00 threshold, and he promptly filed once he became aware. The judge set aside the penalties, stating that the average Canadian would find the disclosure in the CRA Guide on T1135 reporting requirements to be confusing and could not reasonably be expected to recognize that they were required to file a T1135.
Click here to read the full judgement
There are a number of exclusions set out in the Income Tax Act. The list of specified foreign properties caught by the T1135 requirements and those properties that are excluded are set out in section 233.3(1) of the Income Tax Act.
Click here to go to section 233.3(1) of the Income Tax Act
If you were required to file a T1135 information return and didn’t do so, give me a call. I will review your case for free during our initial conversation and advise you of the best options to avoid or reduce the penalties.