Own foreign property, including stocks? Better tell the CRA on time or face a penalty

National Post


If you held foreign property whose total cost exceeded $100,000 at any point at any time during 2021, you may be required to complete Canada Revenue Agency’s T1135 Foreign Income Verification Statement form when you file your 2021 tax return this spring.

The reporting covers obvious foreign assets, such as a Bahamian bank account or Bermudian offshore investment portfolio, but you’re also required to complete the form if you have more than $100,000 (based on the total cost amount) of foreign stocks, such as Apple Inc., Microsoft Corp. or Meta Platforms Inc., held in a Canadian, non-registered brokerage account. Personal use property, like an Arizona vacation home, is excluded, as are any assets held in registered accounts such as registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and tax-free savings accounts (TFSAs).

To make the task of identifying your reportable foreign holdings a bit easier, some brokerage firms will send you a foreign property report as part of their annual tax packages, which are typically sent out with the T5 tax slips in February. Each report may vary, but it typically groups foreign holdings and sorts them based on the country code of the security. Other details that may be provided include the maximum month-end fair market value for the calendar year for each country code, along with totals of any income and/or gain (loss) for the year, again by country. This information can be used to easily fill out category 7 (property held in an account with a Canadian registered securities dealer) on the T1135.

If you are required to file a T1135, it’s important you file on time or risk a penalty for late filing of $25 per day to a maximum of $2,500, plus arrears interest. There have been more than 20 reported cases in which taxpayers have gone to court after being assessed a late filing penalty since the 1998 introduction of the form. Many of these cases involved a purely innocent failure-to-file penalty assessed by the Canada Revenue Agency (CRA) even though all the income from the foreign property and/or the capital gain/loss upon its disposition was fully declared on the Canadian return.

The latest case, decided in December 2021, involved a taxpayer who was assessed the maximum $2,500 penalty for filing his T1135 late. He filed his return and T1135 for the 2018 tax year on Aug. 24, 2019, even though the deadline for filing was April 30, 2019. As he was 116 days late, he was subjected to the maximum T1135 penalty.

He wrote to the CRA asking for the penalty to be cancelled, arguing he filed his tax return late because he didn’t owe any tax for 2018 and, therefore, did not think twice about sending the T1135 late. With no tax owing, he was unaware he would be penalized. He noted his late filing did not result “in any benefit to him or in any loss to the CRA.”

On Aug. 13, 2020, the taxpayer’s request for relief was denied by the CRA. He then sought a second review, adding that the basis for his relief was due to “ongoing health issues experienced by two family members.” He stated that engaging with those issues “became a priority for him and he was unable to find time for certain other activities such as filing his income tax.”

In March 2021, his request was again denied despite the CRA acknowledging his family’s health issues. “When ongoing medical conditions exist that prevent you from meeting your tax obligations, you are expected to make other arrangements so that we receive your forms by the due date,” the CRA said.

The taxpayer then went to Federal Court seeking a judicial review of the CRA’s decision, saying its decision was “unreasonable as it failed to consider the relevant circumstances, and was an improper exercise of the (CRA’s) discretion.”

As in all such cases, the issue before the court was whether the CRA’s decision to deny relief was “reasonable.” Prior jurisprudence has concluded that a reasonable decision “is one that is based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.” To set aside a decision on this basis, “the reviewing court must be satisfied that there are sufficiently serious shortcomings in the decision such that it cannot be said to exhibit the requisite degree of justification, intelligibility and transparency.”

The taxpayer argued that, other than the 2018 tax year, he had never filed his T1135 late and he had always provided “full disclosure about his foreign property,” adding there was “absolutely no change in any of the information, and therefore filing a T1135 every year does not add any value to CRA’s goal of achieving compliance.” According to the taxpayer, this was “an obvious example of unnecessary red tape.”

He further argued the $2,500 penalty was “unfairly harsh for small taxpayers” such as himself. “It is commonly known that many wealthy Canadians avoid paying taxes by setting up offshore accounts, and many more are unaware of their obligation to file T1135 forms. The … CRA should be going after those who evade the tax system through setting up offshore accounts instead of compliant taxpayers like himself, who only owns a small piece of foreign property and has been diligent in income tax filing for decades.”

The judge was sympathetic to the taxpayer’s circumstances, but her role was simply to determine whether the CRA’s decision to deny relief was reasonable. In this case, completing the T1135 only required the taxpayer to “check off three boxes, something that (he) has done, by his own account, for several years. While acknowledging this small task might seem daunting to someone who was facing other challenges, I do not find it unreasonable for the (CRA) to conclude that the (taxpayer) had time to make alternative arrangements to fulfil his tax filing requirement.”

As a result, the judge found no basis to interfere with the CRA’s decision and the penalty for late filing was upheld.