Beware foreign income filing penalties

National Post


It’s one of the harshest penalties in the Income Tax Act and one in which the Canada Revenue Agency appears to show no mercy from assessing, even on a completely innocent first-time occurrence.

Of course, I’m referring to the penalties for failing to file Form T1135, the “Foreign Income Verification Statement” on time. This is the form you must file annually if you answer that question on the top of page two of your personal tax return: “Did you own or hold foreign property at any time [last year] ... with a total cost of more than CAN$100,000?”

On the T1135 Form, you are asked to state the types of foreign investments you own, the total cost of those investments along with their geographical locations. You must also report the total foreign income you reported on your tax return from these foreign investments.

As for the penalties, if you fail to file the form on time, it will cost you $25 per day, to a maximum of $2,500. If you knowingly or under circumstances amounting to “gross negligence” fail to file the form, the penalty jumps to $500 for each month the form is not filed, to a maximum of 24 months.

In the past, the CRA used to waive these harsh penalties for first time non-filing offences; however, recently the CRA changed its “one chance” administrative policy and has been assessing penalties even on first-time occurrences.

Take the case of Simon and Beth Smith who last week each received Notices of Assessment assessing them each with a penalty of $2,425 plus $128 of interest for a total of $5,106 for late-filing their 2009 T1135s.

The Smiths (not their real name) jointly own a modest Florida condo that they rent out. They declare all their income from this condo every year on their tax returns. In 2009, they were owed a refund and were about to file when Simon got sick and as a result, didn’t end up filing until August 5, 2010.

August 5th is 97 days after their filing due date of April 30th resulting in the penalty of $2,425 (97 X $25). But because their condo was jointly-owned, both Simon and Beth were each assessed the identical penalty.

According to Simon “We are two teachers who have a modest rental property in Florida and a $5,000 penalty seems unreal for a late filed form. We filed (online) using the QuickTax software and had no idea that these types of penalties existed for this form.”

QuickTax (renamed TurboTax in 2010) in fact does provide a warning for those who NETFILE which states, “For NETFILE purposes, form T1135 needs to be printed and mailed separately to the Ottawa Tax Centre.” The software then displays the address to which you must send the form.

Nevertheless, the Smiths are now facing substantial penalties and interest for failing to file their forms on time. In their case, however, they may be eligible for some relief under the “fairness provisions” of the Act.

These rules, known formally as the “taxpayer relief provisions,” provide the CRA with the discretion to cancel or waive penalties and/or interest assessed to taxpayers who, because of circumstances beyond their control, are unable to meet their tax obligations.

Examples of these circumstances include misfortunes (sickness, death in the family), natural disasters (fire, floods), service disruptions (postal strike), or an error by the CRA (incorrect information). Request for relief can be filed using CRA Form “RC4288, Request for Taxpayer Relief.”

Since being assessed these penalties, Simon has visited his family doctor and obtained copies of correspondence from a medical specialist detailing the nature of his illness and why he could not file on time.

This has been submitted to the CRA along with his completed RC4288. Whether he gets the relief he and his wife so desperately desire remains to be seen, but in the meantime, Simon wants his story to be heard as a warning to others who may also be innocently affected.

“We welcome the opportunity to bring attention to this draconian tax penalty,” said Simon.