CRA rules on application of simultaneous T1135 penalties
The Canada Revenue Agency (CRA) was recently asked to rule on whether the penalties under subsections 162(5) and 162(7) of the Income Tax Act (Act) can apply simultaneously if a taxpayer late-files Form T1135 - Foreign Income Verification Statement (T1135) and the form is also missing required but insubstantial information. The CRA concluded that penalties under subsections 162(5) and 162(7) can be applied simultaneously, but assessing both may not always be appropriate.
Please refer to our previous Tax Alert for a background on the T1135.
Interaction of T1135 penalty provisions
Subject to certain exceptions, subsection 162(5) of the Act provides a penalty equal to $100 for each failure to provide any information required on an information return. Subsection 162(7) of the Act provides a penalty equal to the greater of $100 and $25 per day up to a maximum of $2,500 on failure to file an information return by its due date. However, subsection 162(7) generally does not apply where another provision of the Act sets out a penalty for the failure. For example, if a penalty is being assessed under subsection 162(7.02) for a failure to file an information return electronically, subsection 162(7) would not apply.
When a T1135 is filed by its due date but is missing information that is not substantial, it is the CRA’s view that subsection 162(7) cannot apply because subsection 162(5) ‘sets out’ a penalty for the failure to provide information. However, if the missing information is substantial, the CRA opined that subsection 162(7) may apply instead of subsection 162(5) because an information return that is missing substantial information will be considered invalid and not to have been filed. The CRA has previously advised that an information return will be considered invalid where necessary and substantive elements are missing, or incorrectly stated. The purpose of T1135 penalties is to encourage accurate information reporting of foreign assets held outside Canada. Examples of substantial T1135 information might include information on a taxpayer’s interest in a foreign insurance policy or a taxpayer’s ownership of shares of a non-resident corporation. If such information is missing, the CRA may consider the T1135 to be missing substantial required information and thus be invalid such that a subsection 162(7) penalty would apply rather than subsection 162(5).
According to the CRA, for the penalties under subsections 162(5) and 162(7) to be applied simultaneously, late-filing an incomplete T1135 must be considered two separate failures. This would be the case where an information return was not filed on time and the return was also missing substantial required information. In the CRA’s view, it would not be appropriate in this scenario for only one penalty to be assessed because the penalties pursuant to subsections 162(5) and 162(7) are different: a taxpayer would only be liable to a maximum penalty of $100 under subsection 162(5) for failing to provide required information whereas a taxpayer that late-filed a T1135 would be subject to a penalty of up to $2,500 under subsection 162(7) for failing to file a return by its due date. If a single penalty approach were to apply, taxpayers may not be diligent in the preparation of their T1135s and might simply file incomplete or incorrect T1135s to avoid the higher maximum penalty under subsection 162(7).
On the other hand, if the example is considered two separate failures, the taxpayer would appropriately be subject to a subsection 162(7) penalty for late-filing the return and a subsection 162(5) penalty for failing to provide required information on the return when it was filed. CRA considers this approach reasonable, as the penalties would each address different failures.
Thus, the CRA stated that where a taxpayer late-files a T1135 and the return is missing some required information, the Minister may technically assess penalties under both subsections 162(7) and 162(5). However, the relevant facts should be considered so as not to levy penalties that are disproportionate or inequitable in the circumstances.
T1135 penalties should be commensurate with the circumstances
A taxpayer should comply with all tax reporting obligations prescribed by the Act. However, the CRA suggests in this ruling that it is willing to adopt a reasonable approach in applying penalties where care has been taken to timely report, and the best of the taxpayer’s abilities in the circumstances.