CRA decision to deny taxpayer late-filing relief sent back for review by judge

National Post


If you own foreign investments whose total cost exceeds $100,000 at any point in a tax year, you’re required to file a Form T1135, Foreign Income Verification Statement, which covers obvious foreign assets, such as funds in a Cayman bank account, but also foreign stocks held in a Canadian, non-registered brokerage account.

Foreign securities held inside pooled products, like Canadian mutual funds, or inside a registered account, such as a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), registered education savings plan (RESP), registered disability savings plan (RDSP) or first home savings account (FHSA), are excluded. A foreign vacation home, like a Florida condo, is also excluded provided it’s primarily for personal use.

The penalty for failing to file a T1135 on time is $25 per day to a maximum of $2,500, plus non-deductible arrears interest, compounded daily, charged at the prescribed rate for overdue taxes, which is currently sitting at nine per cent. If you are more than 100 days late in filing the form for a particular tax year, you’re hit with an automatic late-filing penalty of the $2,500 maximum, plus interest.

That’s what happened to an Alberta taxpayer who filed her T1135s for the 2015 and 2016 tax years in 2020. The Canada Revenue Agency assessed the taxpayer penalties and interest totalling about $6,000 for not filing the two T1135s on time.

After being assessed, the taxpayer wrote to the CRA requesting relief from the penalties and interest. She provided medical information to the CRA about her and her husband’s health situations and described the long-standing challenges she was experiencing in areas such as decision-making, time management and accuracy, which made it difficult for her to carry out complex tasks, such as filing tax returns. It also described health issues experienced by her spouse, which limited his ability to assist the taxpayer and required the taxpayer to care for him.

But this wasn’t good enough for the CRA, which denied her request for relief, concluding that the couple’s medical situation should not have prevented them from filing the required forms on time. The officer noted the taxpayer was capable of running her business, which, in the officer’s opinion, was of “comparable complexity” to filing tax returns.

The CRA officer also considered whether the taxpayer “had acted quickly” to remedy her failure to file her T1135s. Since she was able to file her 2017 and 2018 forms on time, the officer concluded there was no justification for her failing to file her 2015 and 2016 forms when they were due.

But the evidence showed the taxpayer in 2019 contacted the CRA seeking confirmation as to which T1135s were missing. She didn’t receive a response and wrote to the CRA again in the spring of 2020. The CRA responded in July 2020 and the taxpayer provided the outstanding T1135s by August 2020. The “delay” in filing was partly attributable to the CRA’s late response to the taxpayer’s inquiries.

The taxpayer requested a secondary review by a different CRA officer and provided additional medical information to the CRA. That second review officer also refused to grant relief. The taxpayer, feeling that the CRA officer’s decision was unreasonable because it failed to take proper account of her medical circumstances, appealed the decision to Federal Court. The court’s role, as in prior such T1135 cases, is to determine whether the CRA officer’s decision to deny relief was reasonable.

In court, the judge reviewed the evidence, including the inference by the CRA officer that since the taxpayer, an interior designer, had been able to keep her business going, notwithstanding her health issues, there was no reason why she could not file her tax forms.

“It is not clear how the officer equated her ability to continue to function in that capacity (as an interior designer) with her ability to manage complex tax matters,” the judge said. “There is nothing in the record that would support that conclusion.”

The judge also noted the taxpayer had previously provided the same medical information to a different CRA officer along with a separate request for relief on her late GST filings. That officer approved her request and cancelled penalties and interest for the 2015 to 2019 tax years, covering the same years for which the taxpayer had sought relief for filing her T1135s late.

Ultimately, the judge had to determine why two different CRA agents reached opposite conclusions based on the same evidence. Was it because each CRA officer, having a degree of discretion, weighed the same evidence differently? Or was it because of an error made by one of the officers?

Fortunately for the taxpayer, the judge concluded that the CRA’s refusal to grant relief for the late-filed T1135s was the result of “faulty inferences” from the evidence that rendered the conclusion “unreasonable” as it was “not justified, transparent or intelligible” nor did it respond “meaningfully” to the medical evidence the taxpayer had provided.

The judge allowed the application for judicial review and ordered the matter be sent back to the CRA for reconsideration by a different officer.