A recent Tax Court of Canada decision relied on a taxpayer’s history of due diligence to vacate T1135 Foreign Property Verification Statement (‘T1135’) late filing penalties.
T1135s are intended to enhance taxpayer compliance with foreign-source income reporting. They also allow CRA to collect information to combat international tax evasion and aggressive tax avoidance.
Canadian resident corporations, individuals, and certain partnerships and trusts that own Specified Foreign Property (‘SFP’) with an aggregate cost base exceeding CAN$100,000 must file a T1135. T1135 filings are due on the same date as the reporting taxpayer’s income tax returns.
Generally, SFP includes foreign property ranging from real estate, to cash and intangible property such as foreign insurance policies, interests in offshore mutual funds, shares in non-resident corporations, or debt owed by a non-resident. Property owned primarily for personal use or used to carry on an active business is excluded from T1135 reporting.
The penalty for a late T1135 filing is equal to the greater of $100 and $25 per day up to a maximum of $2,500. Additional penalties of $500 or $1,000 per month are possible where the taxpayer knowingly, or through gross negligence, fails to comply.
A taxpayer can seek to mitigate late filing penalties through CRA’s Voluntary Disclosure Program (‘VDP’) for the 10 prior taxation years. CRA’s VDP gives taxpayers a second chance to correct unintentional errors or omissions in income tax filings. While taxpayers are still required to pay any taxes and interest owing, relief from prosecution and penalties may be possible. CRA notes that VDP applications filed by taxpayers who have intentionally avoided their tax obligations will not be granted the same relief as those who want to correct an unintentional error.
Moore vs. The Queen appeal to the Tax Court of Canada
Moore acquired shares of a foreign parent corporation over a number of years, under an employer-sponsored share purchase plan. He properly reported all dividends received from such shares. Shortly after his 2016 return filing due date, Moore realized that a T1135 filing had been required for the shares starting in his 2015 tax year, when their aggregate cost base first exceeded $100,000.
Moore did not formally apply under CRA’s VDP. Instead, he wrote to CRA informing it of this omission and duly filed T1135s for both his 2015 and 2016 tax years. As a result, Moore was assessed a $2,500 penalty for failing to file his 2015 T1135 on a timely basis. He subsequently continued to timely file T1135s annually as required.
The court allowed his appeal of the $2,500 penalty invoking the sparingly-used, judge-made due diligence defence. In doing so, the judge referred to a prior Tax Court decision which established that taxpayers could not be expected to know that T1135 late filing penalties would only be waived under the CRA’s VDP, as neither fraud nor non-disclosure of income were involved.
Applying the principles of that case to Moore, Boyle J highlighted that Moore was not cavalier about his tax obligations and that reasonable taxpayers could not be expected to find the correct information on the reporting requirements relating to SFP in the Income Tax Guide published by the CRA. The guide’s table of contents makes no reference to SFP and only contains a heading for foreign income under which some information is found about SFP. The court commented on the oddity of this taxonomy, given that the statutory filing requirement for ownership of SFP does not depend on any income being generated from this kind of property.
Boyle J supported the appropriateness of the due diligence defence in Moore by noting that the taxpayer’s disclosure on a voluntary basis of his failure to file a 2015 T1135 was precisely the type of compliance effort that CRA should be encouraging Canadians to make. The judge further suggested that the penalties and appeal would likely not have arisen had Moore simply begun filing prospective T1135s, implying that but for the taxpayer’s disclosure, the reporting omission might have gone undetected by CRA. Finally, Boyle J observed that it would not make sense for Moore to lose the appeal and subsequently apply under CRA’s Fairness Review program for penalty relief, given the comments made in this case regarding the lack of clear information in the Income Tax Guide and the taxpayer’s diligence.
Due diligence can save you
Taxpayers’ due diligence in complying with ITA obligations can be a mitigating factor when seeking relief from late filing penalties. Due diligence is a common law defence that judges are cautious applying. The Moore case suggests that unclear administrative guidance, coupled with a taxpayer’s conscientious and otherwise compliant behaviours, are circumstances that could allow for a successful use of this defence.