Own foreign real estate, including inventories? Tell the CRA in time, otherwise you will be fined

Taxes Personal Finances

Jamie Golombek: The penalty for late filing of the T1135 form is $25 per day up to a maximum of $2,500, plus interest arrears

Publication date:

13 Jan. 2022 • January 13, 2022 • 5 minute reading • 8 Responses You are required to declare to the CRA if you have more than $100,000 (based on the total expense amount) in foreign stock, such as Apple Inc., Microsoft Corp. or Meta Platforms Inc., in a Canadian unregistered brokerage account. Photo by Drew Angerer/Getty Images files

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If you owned foreign property whose total cost exceeded $100,000 at any time in 2021, you may need to complete the Canada Revenue Agency’s T1135 Foreign Income Verification Statement form when you file your 2021 tax returns this spring.

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The reporting will cover obvious foreign assets, such as a Bahamian bank account or Bermuda offshore investment portfolio, but you should also complete the form if you have more than $100,000 (based on total expense amount) in foreign stocks, such as Apple Inc., Microsoft Corp. or Meta Platforms Inc., held in a Canadian unregistered brokerage account. Property for personal use, such as a vacation home in Arizona, is excluded, as are assets in registered accounts such as Registered Retirement Savings Plans (RRSPs), Registered Retirement Funds (RRIFs), and Tax-Free Savings Accounts (TFSAs).

To make identifying your reportable foreign holdings a little easier, some brokerage firms will send you a foreign real estate report as part of their annual tax packages, which are typically sent in February with the T5 tax slips. Each report may be different, but it typically groups foreign assets and sorts them by the security’s country code. Other details that may be provided are the maximum month-end fair market value for the calendar year for each country code, along with totals of revenue and/or profit (loss) for the year, again by country. This information can be used to easily complete Category 7 (real estate in an account with a Canadian registered broker) on the T1135.

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If you must file a T1135, it’s important that you file on time or you risk a late filing penalty of $25 per day up to a maximum of $2,500, plus interest in arrears. Since the form’s introduction in 1998, more than 20 cases have been reported where taxpayers have gone to court after being fined for late filing. Many of these cases involved a purely innocent fine for failing to file a return, assessed by the Canada Revenue Agency (CRA), even though all income from the foreign real estate and/or capital gains/losses by disposition were fully declared on the Canadian tax return. †

The latest case, decided in December 2021, involved a taxpayer who was imposed the maximum fine of $2,500 for late filing his T1135. He filed his tax return and T1135 for the 2018 tax year on August 24, 2019, although the filing deadline was April 30, 2019. Because he was 116 days late, he was subject to the maximum T1135 fine.

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He wrote to the CRA asking for the fine to be revoked, arguing that he filed his tax return late as he owed no tax for 2018 and therefore didn’t think twice about sending the T1135 late. Because he owed no tax, he did not know that he would be punished. He noted that his late filing did not result in “any benefit to him or any loss to the CRA.”

On August 13, 2020, the taxpayer’s exemption request was rejected by the CRA. He then sought a second assessment, adding that the basis for his relief was due to “ongoing health problems experienced by two family members.” He stated that addressing those issues “became a priority for him and he couldn’t find time for certain other activities, such as filing his income taxes.”

In March 2021, his request was again denied, despite the CRA acknowledging his family’s health concerns. “If there are ongoing medical conditions that prevent you from meeting your tax obligations, you are expected to make other arrangements so that we receive your forms by the due date,” the CRA said.

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The taxpayer then went to federal court for a judicial review of the CRA’s decision, saying his decision was “unreasonable because it failed to take into account the relevant circumstances and was an improper exercise of the (CRA)’s discretion.” .

As in all such cases, the issue before the court was whether the CRA’s decision to deny the waiver was “reasonable”. Prior case law has concluded that a reasonable decision “is a decision based on an internally coherent and rational chain of analysis and justified in relation to the facts and legislation limiting the decision maker.” In order to quash a decision on this ground, “the referring court must be satisfied that there are sufficiently serious shortcomings in the decision that it cannot be said to have the required degree of justification, comprehensibility and transparency.”

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The taxpayer argued that apart from the 2018 tax year, he had never filed his T1135 late and that he had always provided “full disclosure of his foreign ownership”, adding that there was “absolutely no change in the information, and therefore a T1135 every year adds no value to CRA’s goal of achieving compliance.” According to the taxpayer, this was “an obvious example of unnecessary red tape”.

He went on to argue that the $2,500 fine was “unreasonably heavy for petty taxpayers” like himself. “It is well known that many wealthy Canadians avoid tax by setting up foreign accounts, and many more are unaware of their obligation to file T1135 forms. The…CRA should go after those who evade the tax system by setting up offshore accounts rather than compliant taxpayers like himself, who own only a small sliver of foreign real estate and have been diligent in filing income taxes for decades.”

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The judge understood the taxpayer’s circumstances, but its role was simply to determine whether the CRA’s decision to deny exemption was reasonable. In this case, completing the T1135 only required the taxpayer “tick three boxes, something that (he) has been doing on his own behalf for several years. While acknowledging this small task may seem daunting to someone facing other challenges, I do not consider it unreasonable for the (CRA) to conclude that the (taxpayer) had time to make alternative arrangements to meet his tax return obligation.”

As a result, the judge found no basis to interfere with the CRA’s decision and the fine for late filing was upheld.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the General Manager, Tax & Estate Planning at CIBC Private Wealth in Toronto.Jamie.Golombek@cibc.com

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This post Own foreign real estate, including inventories? Tell the CRA in time, otherwise you will be fined

was original published at “https://financialpost.com/personal-finance/taxes/own-foreign-property-including-stocks-better-tell-the-cra-on-time-or-face-a-penalty”