Canadian taxpayers who own, but fail to report, certain foreign property continue to get hit with harsh penalties from the Canada Revenue Agency for either non-filing, or late-filing, of the dreaded Form T1135, Foreign Income Verification Statement.
While some taxpayers simply pay the penalty and move on, others may choose to challenge the penalty, first by writing to the CRA begging for relief, and, if unsuccessful, taking the matter to federal court where a judge will decide whether the CRA officer’s decision to deny relief was reasonable. A June 2026 federal court decision dealt with a couple who immigrated to Canada, and were hit with penalties for failing to file their T1135s on time.
Before reviewing the details of the case, here’s a brief overview of the foreign reporting rules, including the penalties for late-filing.
If you own “specified foreign property” where the total cost amount of all such property, at any time in the year, was more than $100,000 in the prior year, you must complete form T1135. Foreign property includes such assets as a Florida bank account, as well as shares of widely-held U.S. corporations such as Apple Inc. or Nvidia Corp. if held in a non-registered account. Personal use property, such as an Arizona condo, is excluded, as are any assets held in registered accounts such as a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
Failure to file the form can lead to a late-filing penalty of $25 per day to a maximum of $2,500, plus arrears interest. For taxpayers who fail to file the T1135 “knowingly or under circumstances amounting to gross negligence,” the penalty jumps to $500 per month for each month that the return is late, to a maximum of $12,000. After 24 months, the penalty becomes five per cent of the cost of the foreign property, less any penalties already assessed.
The most recent T1135 case involved a couple who immigrated to Canada in October 2018 and returned to India the following month, where they remained until May 2019. Upon their return to Canada, the taxpayers filed Canadian tax returns, but neglected to file the T1135 forms for 2018 and 2019.
It later occurred to them that they should have been filing T1135s to report foreign property from the year they immigrated. (While there’s generally an exemption to file for the year you immigrate, it seems that this couple was previously resident in Canada a decade earlier and therefore this exemption didn’t apply to them.) As soon as they realized they ought to be reporting their foreign assets, they voluntarily filed the missing T1135s, along with their regular tax filings, in April 2022.
Rather than thanking the taxpayers for their honesty and for coming forward about their foreign assets, on June 1, 2022, the CRA issued Notices of Reassessment to the taxpayers for the 2018 and 2019 taxation years, indicating that they were each being charged a $2,500 penalty for each late filing ($5,000 in total for each year), plus arrears interest, for the late-filed T1135s.
The taxpayers wrote to the CRA requesting relief from the penalties and arrears interest, arguing that they had acted diligently and in good faith to correct their error; that the error itself had minimal impact on their tax liability; and that paying the penalties and arrears would cause financial hardship because they did not have income and relied financially on their son.
The taxpayers explained that they failed to file T1135 forms because they misunderstood their reporting requirements. They believed that the form was only for foreign income over $100,000, not for foreign property whose cost was at least $100,000. This is understandable, as the name of the form itself is Foreign Income Verification, yet the form is required even if your foreign income in a year is zero, if the cost amount of your foreign assets was more than $100,000.
The first CRA reviewing officer concluded that because the T1135s had not been filed until April 2022, the taxpayers had not acted “in a timely manner to rectify the noncompliance.” But the reviewer did grant partial relief by treating the two late filings as a single late filing, and cancelled the penalty and arrears interest for 2018.
The taxpayers sought a second-level review, noting that they had been confused about their reporting requirements, as they were very recent newcomers to Canada, having only been residents since late 2018, which was the first of the two missing years from their reporting.
The CRA’s second-level reviewer denied their request for further relief, finding that the taxpayers were responsible for ensuring that the forms were filed on time, and noting that the CRA provides various publications to assist newcomers with filing their taxes.
Oddly, the CRA reviewer further noted that each taxpayer “has a history of not filing by the due dates, has knowingly allowed a balance to exist, did not exercise reasonable care and did not act quickly to remedy the omission.” Finally, the CRA officer found that there was no basis to the taxpayers’ claim that these penalties would cause financial hardship, which the CRA interprets as an inability to afford basic necessities.
The couple then appealed to the federal court, seeking a judicial review of the second-level CRA officer’s decision not to grant them relief. As in prior such cases, the federal court’s role is to determine whether the CRA’s decision to deny relief was reasonable.
The judge reviewed the facts and circumstances of the case, and found it “problematic” that the CRA reviewer appeared to rely on the fact the couple late-filed their 2018 and 2019 T1135s as evidence of the couple’s history of not filing on time. As the judge wrote: “the (CRA agent) found that the (taxpayers’) failure to file their 2018 and 2019 T1135 forms was a relevant factor in denying their request for relief for failing to file their 2018 and 2019 T1135 forms. This circular form of logic often leads to unreasonable outcomes because it turns the premise of a request for relief into a reason for denying it.”
As a result, the judge ordered the matter back to the CRA for reconsideration by a different officer.