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The Complexity of Assessing T1135 Penalties

By Jeff Buckstein

A double penalty can be assessed against taxpayers who file a Form T1135 Foreign Income Verification Statement that is both late, and contains incomplete information, but only under certain circumstances, says Canada Revenue Agency.

CRA’s Tax Interpretation 27 June 2019 Internal T.I. 2019-079154117 – Interaction of 162(5) and (7) states that the Minister of National Revenue “may technically assess penalties under both subsection 162(7) (for late-filing the return) and subsection 162(5) (for not providing all the required information on the return that was filed).”

However, the “courts have…shown a dislike for disproportionate penalties on more than one occasion. Therefore, we suggest that care be taken to ensure that assessing penalties under subsections 162(5) and (7) is both appropriate based on the relevant facts of a situation and equitable to the tax community as a whole,” CRA says.

Subsection 162(7) covers a failure to comply and can result in a penalty that is the greater of: $100; or $25 a day for up to 100 days that the failure continues, for a maximum penalty amount of $2,500.

Subsection 162(5) states that a taxpayer who fails to provide required information is liable to be assessed a penalty of $100. [An exception may be permitted in situations where the taxpayer has made a reasonable effort but been unsuccessful in obtaining missing information required from another person or partnership].

Form T1135 must be filed by Canadian taxpayers who possess specified foreign property in excess of $100,000 in [cost] value at any time during the taxation year. Personal-use property such as a vacation home used for more than 50 per cent of the year, as well as art, jewellery, rare folios, rare manuscripts, rare books, stamps, or coins, is exempt from this reporting threshold.

CRA notes that in order for the Minister to assess a penalty under subsection 162(5) and another one under subsection 162(7) for the same Form T1135, the late-filing and incomplete return must be considered as two failures, not one.

The Agency made clear that it supports this double penalty viewpoint. “In our view, this would constitute two failures: the return was not filed on time and the return was missing information. This would permit (but not require) the Minister to assess a penalty for each of the failures,” the Tax Interpretation says.

However, CRA also notes that some nuances exist in assessing penalties based on subsections 162 (5) and (7).

CRA says that if missing information about the taxpayer’s foreign owned property is substantive, Form T1135 will be considered invalid and, therefore, not considered to have been filed in the first place. In that instance, a penalty of up to $2,500 may be applied under paragraph 162(7), rather than the $100 under subsection 162(5). If gross negligence was involved, additional penalties under subsection 162(10) might also apply, depending on how long Form T1135 remained incorrect and incomplete.

However, CRA also states that in instances where Form T1135 was filed late, and included missing, but non-substantial information about a specified foreign property, a penalty for failure to comply under subsection 162(7) cannot apply if another provision of the Income Tax Act already establishes a penalty.

Furthermore, the Agency notes, if a Form T1135 was filed on time, but failed to provide the necessary information, the taxpayer would only be liable to a maximum penalty of $100 under subsection 162(5). In comparison, a taxpayer that late-filed a complete Form T1135 would only be liable to the higher maximum penalty of $2,500 under subsection 162(7).

“In our view, such an approach [one failure] would ‘discourage taxpayers from being diligent and taking reasonable care in the preparation of their returns,’” the Agency concludes.

The administration of CRA penalties, as illustrated by this Tax Interpretation, can be quite complicated, but rest assured that when it comes time to file Form T1135, taxpayers who do so on time and with complete information will not have to worry about any penalty.

If you have any questions about this, or any other tax issue, CPA Solutions LLP is always pleased to assist.

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