If you own shares of Citigroup, Ford or Microsoft in your Canadian non-registered brokerage account, you could be facing huge penalties and interest for non-disclosure of these "offshore" assets, even if you fully included any dividends received or capital gains realized on your Canadian tax return.
Much attention has been given in these pages recently to the Canada Revenue Agency's crackdown on offshore accounts, and, in particular, to the CRA's most recent focus on 1,000 HSBC accounts it learned about from the government in France. Far less ink has been spilled, however, concerning our own government's overzealous foreign-reporting requirements.
Form T1135, the "Foreign Income Verification Statement" is the form Canadian taxpayers (including corporations) must file annually if you innocently answer affirmatively to that seemingly innocuous question on page two of your personal tax return: "Did you own or hold foreign property at any time [last year] ... with a total cost of more than CAN$100,000?"
On the T1135 Form, you are asked to state the types of foreign investments you own, the total cost of those investments along with their geographical locations. You are then asked to identify the total income you reported on your tax return from the identified foreign investments.
While the requirement to disclose truly offshore or foreign investments can be justified as a means to aid the CRA's enforcement under our self-reporting, worldwide income taxation regime, the requirement to disclose foreign investments held in Canadian brokerage accounts seems to make little sense and can lead to severe penalties even if the foreign income from the "non-disclosed" investments was fully reported.
Under the Income Tax Act, the general penalty for failing to file the form is $25 per day, to a maximum of $2,500. If you knowingly or under circumstances amounting to "gross negligence" fail to file the form, the penalty jumps to $500 for each month the form is not filed, to a maximum of 24 months.
While historically the CRA used to waive these harsh penalties for first time non-filing offences, in the past few years, the CRA changed its "one chance" administrative policy and has been assessing penalties even on first-time occurrences.
The most recent publicly available example of this is seven related cases that involve applications for judicial review from various companies in the Asper Group.
In 1998 and 1999, T1135 forms were filed for the Asper companies' foreign holdings, but, for whatever reason, their accounting firm concluded that T1135 forms were not required where an investment portfolio was managed by a Canadian investment manager subject to Canadian tax reporting requirements. As a result, they stopped filing the forms beginning in 2000 until they were asked by the CRA to do so in 2005.
In each of these seven cases, the judge was asked to review the decision of the CRA denying the seven companies' request for relief from penalties and arrears interest assessed because of late filing of T1135 forms concerning foreign investment property held in each of the seven companies.
Note that while not publicly reported, at a penalty rate of $2,500 for each late-filed form over four or five years for seven companies, the total penalties and interest assessed are estimated at over $75,000.
And to what end? For the companies' failure to disclose "foreign" investments, administered through professional money managers who already report all trading activity and investment income directly to the CRA. It should be stressed that during these five years, the Asper companies fully reported and paid tax on all their foreign income.
The CRA, defending its decision to assess penalties and interest, said that there was a conscious decision by the Asper companies not to file the T1135 forms, the companies used a professional accountant in the tax return preparation and the forms were only filed after the CRA notified the companies of their non-compliance. The judge dismissed the Asper companies' applications for judicial review, effectively upholding the penalties and interest charged.
These seven cases, along with three other similar decisions, now bring the total to 10 reported federal court cases in the past year or so dealing with failed attempts by taxpayers to get relief from penalties and interest for late-filed T1135 forms.
Not withstanding any reversal upon appeal, which has already been filed, it's high time that the legislation was reformed to either formally introduce a "one-chance policy" or, even better, to carve out foreign securities held in Canadian brokerage accounts from the definition of "specified foreign property" required to be reported on Form T1135.