CRA Confirms that Penalties for Failure to File Foreign Property Information Form can be Statute-Barred
By Michael Atlas
Michael Atlas is a Toronto-based Chartered Professional Accountant who practices as an independent consultant on high-level Canadian tax matters, with particular emphasis on international tax issues. More information regarding his practice is available at www.taxca.com. He is also the author of Canadian Taxation of Non-Residents. The 5th Edition of this highly acclaimed book is available now.
Under subsection 233.3(3) of the Income Tax Act (“the Act”), Canadian residents are generally required to file form T1135 for any year in which they have “specified foreign property” with a total cost base of more than $100,000 at any time in the year.
This form is generally due at the same time that the taxpayer’s normal income tax return is due (‘filing due date”).
But what happens if the return is not filed on time? In most cases, this means that the taxpayer can be subject to a penalty of $25/day for each day late, with a 100 day (i.e. $2,500 maximum).
Many taxpayers and their advisors automatically assume that if there are unfiled forms that go back for many years, the CRA can assess penalties for all of those years, without any limitation. After all, if a tax return has never been filed and assessed, the year can never be “statute barred”, so wouldn’t the same apply to an information form that has never been filed?
The answer is “no”. A penalty for failure to file a form T1135 is generally levied under subsection 162(7) of the Act. That penalty would be a penalty for the relevant year that is levied under Part I of the Act. Generally, subsection 152(4) of the Act limits the time during which the CRA may levy a penalty under Part I of the Act to the “normal reassessment period”. Usually, this period ends three (3) years after the date of the original assessment of the return filed under Part I for the relevant year; however, in the case of corporations that are not “Canadian-controlled private corporations”, the period ends four (4) years after that date.
Generally, the only way that the CRA may assess a penalty for a year, after that date, is where:
“the taxpayer or person filing the return
(i)has made any misrepresentation that is attributable to neglect, carelessness or willful default or has committed any fraud in filing the return or in supplying any information under this Act”
Within the context of filing a T1135, presumably if an individual answers “no” in the section of the T1 return that is related to “specified foreign property” and the obligation to file a T1135, that is a type of “misrepresentation”. However, it is a question of fact as to whether that is attributable to “neglect, carelessness or willful default”.
For example, a taxpayer may have good reason to believe that the requirement does not apply to him or her. The rules are quite complex and confusing at times.
In answer to Question 15 of the CRA Roundtable that was held as part of the 2016 Conference of STEP Canada this past June, the CRA reiterated and confirmed a positon that it had taken in CRA Document 2015-057277117.
“The filing deadline for the T1135 is the same as for the filing of the Part I return, and…any assessment for failure to file on time pursuant to subsection 162(7) must, subject to subsection 152(4), be made within the normal reassessment period for Part I”.
Accordingly, taxpayers and their advisors should not automatically assume that the CRA can successfully apply penalties for unfiled form T1135 for old years. It will always be a question of fact as to whether the taxpayer has made a misrepresentation that is “attributable to neglect carelessness or willful default”.
In this regard, although I know of no reported tax cases that deals with this issue, there is a Tax Court of Canada decision that deals with this type of issue within the context of penalties for unfiled forms T1134 (foreign affiliate reporting). The issues are essentially the same. In that decision, the court held that the taxpayer was not liable for the penalty because it was statute-barred-he had good reasons for thinking the T1134 was not required-see Desmarais v. The Queen, 2014 DTC 1044.