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If you own foreign property worth more than $100,000 at any point in the year, you must complete Form T1135, Foreign Income Verification Statement, and file it along with your annual income tax return.
When we think of foreign property, our minds may turn to that offshore Swiss bank account or, perhaps, a Florida rental property. But, believe it or not, a T1135 must be filed if you own foreign stocks, such as Apple Corp., Ford Motor Co. or Bank of America, in your Canadian, non-registered brokerage account.
I’ve always wondered why self-reporting one’s such foreign securities is even necessary to ensure proper tax compliance given that the Canada Revenue Agency already gets a copy of your brokerage firm’s T5 slip, which reports any foreign dividends or interest income paid into your account. The CRA also gets a copy of the T5008 slip, which reports any dispositions of securities (including foreign securities) you held in your account and disposed of in the prior year to ensure you are reporting your capital gain (loss). What new information could the CRA possibly get from the T1135 that it’s not already getting via tax reporting?
But I digress. My biggest complaint about T1135 is the harsh penalties that can be assessed by the CRA for failing to file the form on time, even when all the income from the foreign property has been reported. The penalty is $25 for each day the form is late, up to a maximum of $2,500 per tax year, plus non-deductible arrears interest.
Ever since the introduction of T1135 more than two decades ago, there have been at least 20 reported cases in which taxpayers have been assessed a late-filing penalty. Many of these cases involved a purely innocent failure-to-file penalty that was assessed by the CRA even though all of the income from the foreign property and/or the capital gain/loss upon its disposition was fully declared on the Canadian return.
For example, take the latest reported T1135 case, decided just last month, involving a Montreal taxpayer who worked for GE Capital Canada from 2003 to 2016. While employed at GE, the taxpayer took advantage of its employer-sponsored share purchase plan to acquire shares of GE Canada’s parent, a publicly traded U.S. corporation. He acquired the shares gradually via bi-weekly payroll deductions with matched funding from his employer.
In March 2016, GE Capital Canada was acquired by Wells Fargo Canada, where the taxpayer continues to work, but this ended his participation in GE’s employer-sponsored share purchase plan. The taxpayer was then given the option to either sell his shares or transfer them to a Canadian brokerage account, which he did. It was only after this change that he first realized that he should have started filing a T1135 form for 2015 because the aggregate cost of his GE shares in the plan exceeded $100,000.
The evidence before the Tax Court showed that all the dividends received up to that time were properly reported in his tax returns. As the judge commented, “There is no suggestion that any employment benefit from the acquisition was not also properly reported.”
Shortly after the taxpayer filed his 2016 return, he wrote to the CRA to inform it of his failure to file the form for 2015. He duly completed and submitted T1135 forms for both 2015 and 2016 and he has continued to file T1135s annually since then, as required. The CRA, apparently not sufficiently satisfied that an honest taxpayer had voluntarily come forward to formally report his foreign property, slapped him with a $2,500 penalty for not filing his 2015 T1135 on a timely basis.
In court, the CRA provided blank copies of its 2015 tax return form and the portions of the Income Tax Guide for 2015 that it considered relevant to the foreign reporting requirement. The judge examined the documents and observed that the question on page one of the 2015 tax return that asked whether a taxpayer owned “specified foreign property” refers the taxpayer to the 2015 Guide for more information. But when you turn to the guide, the table of contents did not even have a heading for “specified foreign property.” Instead, there was a heading for “Foreign Income,” under which there is some information about what constitutes “specified foreign property.” As the judge said, “This location or heading is odd given that the Act’s filing requirement for ownership of specified foreign property is not income-driven, nor does it matter if income is ever generated by it.”
Under the sub-heading “Specified Foreign Property,” there is a sub-sub-heading, “Shares of a Non-Resident Corporation,” which states that if you hold 10 per cent or more of the shares of a non-resident corporation, you may have to complete a T1134 (Information Return Relating To…Foreign Affiliates). “It literally says nothing about a T1135 form,” the judge said.
The judge observed that the taxpayer “was not cavalier about his income tax obligations.” He reported all benefits and income he received on the shares and paid tax on those amounts. “No amount was misrepresented, mischaracterized or omitted in his 2015 tax return,” the judge said.
One might think the CRA would automatically forgive any penalties for late filing if a taxpayer voluntarily comes forward to correct their return, but that is not the case. Apparently, the CRA requires that this type of disclosure be done under its formal Voluntary Disclosure Program in order to get the late-filing penalty waived.
The judge suggested that this matter would never have gone to court if the taxpayer had chosen to simply let bygones be bygones, skipped the 2015 filing and started filing the form prospectively from 2016, rather than alerting the CRA that the $100,000 threshold was triggered in 2015 and then filing the 2015 form late.
In the end, the judge ordered the penalty to be cancelled and posed, in his words, a “rhetorical question. Is (the taxpayer’s) disclosure to CRA on a voluntary basis of his failure to file a 2015 information return not the type of compliance effort CRA wants to encourage Canadians to follow?”
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the managing director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.