If you own “specified foreign property” where the total cost at any time in the year is more than $100,000, you’re required to complete Form T1135, Foreign Income Verification Statement with your personal tax return.
While most of us would agree that a Swiss bank account with a value of more than $100,000 in it should be reported, you might not realize that shares of foreign corporations such as Apple Inc. or Nvidia Corp. must also be disclosed, even if held in a Canadian non-registered brokerage account. Failure to report foreign property on the T1135 can lead to late-filing penalties of $25 per day to a maximum of $2,500, plus arrears interest, for each taxation year in which you fail to file the form.
And that’s exactly what happened to an Ontario taxpayer who was hit with penalties of $2,500 for each of the 2019 and 2020 taxation years for failing to file T1135 forms. The taxpayer appealed to the Tax Court, which heard the case in September.
At trial, the taxpayer readily admitted that she was indeed required to file T1135s and that she did so late, but felt that she should not have been assessed penalties because she was “duly diligent” in preparing her tax returns.
The judge noted that there are two ways that a taxpayer can satisfy the due diligence test. First, they can show that they took reasonable precautions to avoid the event leading to the penalty. Alternatively, the taxpayer can show that they were mistaken about the facts, and had they had known the true facts, a reasonable person would have made the same mistake.
Unfortunately, this was not the first time that the taxpayer had failed to file a T1135 when required. The taxpayer was a U.S. citizen and after her father’s death in 2012 she realized that she was required to file U.S. tax returns and had not been doing so. She hired an accountant to file both her Canadian and United States tax returns. The accountant discovered that she should have been filing T1135 forms for the 2012, 2013 and 2014 tax years.
In 2015, the accountant filed a voluntary disclosure on the taxpayer’s behalf. The voluntary disclosure stated that the taxpayer “did not originally file these T1135 forms when due as she was under the incorrect impression that foreign holdings within a Canadian brokerage account were not foreign property.” The CRA accepted the voluntary disclosure, and the taxpayer avoided the resulting $2,500 annual failure-to-file penalties.
In 2018, the taxpayer relinquished her U.S. citizenship and decided that since she no longer needed to file U.S. tax returns, she wouldn’t be hiring the accountant just to prepare her Canadian tax returns. That turned out to be a costly decision.
When the taxpayer filed her 2018 tax return on her own, she researched what foreign property was, as she was concerned that an individual retirement account (IRA) in the U.S. that she had inherited from her father might qualify. Finding the definition provided by the tax software that she was using to be confusing, she turned to Google for the answer.
As she was researching information about the IRA, she did not see anything that would have alerted her to the need to consider the cost of U.S. investments held in her Canadian brokerage account on the T1135. Accordingly, she did not look into whether the cost of her foreign investments in 2018 exceeded the $100,000 threshold, which, as it turns out, they did not, the judge calling this “a happy coincidence.”
In 2019, the taxpayer switched brokers and her new broker had a new investment strategy which required her to sell many of her existing investments and purchase new ones. The net effect of these changes was that the cost of her foreign property now exceeded $100,000 and she was, once again, required to file a T1135.
The taxpayer prepared her own 2019 and 2020 tax returns, but having satisfied herself when she filed her 2018 tax return that she didn’t need to file a T1135, she didn’t revisit the issue when filing these returns.
The taxpayer eventually became aware of the problem when, in the course of preparing her 2021 return, she received a new special foreign reporting report from her new broker reporting the cost of her U.S. investments. At that point, she realized that she should have filed T1135s for both 2019 and 2020. She attempted to make a second voluntary disclosure but the CRA rejected it as the taxpayer had already made a prior voluntary disclosure on the same issue.
The judge was sympathetic, describing the taxpayer as a “responsible” person “who files and pays her taxes on time.” He also noted “that it is somewhat counter-intuitive that U.S. investments held in an investment account at a Canadian brokerage are foreign property. This is particularly true because those same investments are not considered to be foreign property when they are held in RRSPs and RRIFs.”
In other circumstances, the judge may have been convinced that a reasonable person might make the same mistake that the taxpayer made. But the question the judge had to determine is whether a reasonable person would have made that mistake in the same circumstances. In other words, having already made a mistake once and having had to go through the voluntary disclosure system in order to avoid having penalties imposed, would a reasonable person make the exact same mistake again?
The judge concluded that they would not, as a reasonable person would have been on high alert to the risks of owning foreign property and the need to report them, and “would have taken careful steps to make sure they did not fall into the same trap again.”
The taxpayer, on the other hand, did the opposite: She stopped using an accountant and returned to preparing her own taxes. While the judge didn’t suggest that she needed to continue to pay an accountant to file her returns, the fact that she resumed filing returns on her own should have put her on a greater level of alert.
As a result, the judge dismissed the taxpayer’s appeal and the T1135 late-filing penalties were upheld.