Jamie Golombek: Form T1135 requires disclosure of all foreign investments and property if above $100,000

While it appears that Prince Harry and Meghan Markle will be coming to Canada for “a period of transition,” it’s unclear yet as to whether they will continue to divide their time between England and Canada or take up residency here. If they ultimately are considered residents of Canada for tax purposes, not only will they be required to file Canadian tax returns but they would be required to disclose all their foreign (i.e. non-Canadian) investment property to the Canada Revenue Agency on form T1135.
This form has proven to be real headache for many non-royals who continue to face penalties of $25 per day, up to a maximum of $2,500, plus arrears interest, for failure to file the T1135 form on time. The rule states that if a taxpayer owned foreign investments, including foreign stocks in a Canadian non-registered brokerage account, with total cost exceeding $100,000 at any point in 2019, they are required to file form T1135 by April 30, 2020. (If you of your spouse or partner were self-employed in 2019, you have until June 15, 2020 to file.)
The most recent case involving a late-filed T1135 and its associated penalty was decided this past November.
The Case
The case involved a New Brunswick taxpayer who went to Federal Court seeking a judicial review of a decision by the CRA not to waive the penalty. It seems the agency twice denied her requests for relief from nearly $1,300 in penalties and interest for filing her 2015 form T1135 49 days late.
The taxpayer owned foreign property during the 2015 tax year with a cost amount more than $100,000. Because of this, she was required to file the T1135. On June 28, 2017, the CRA assessed a late-filing penalty because she submitted her form T1135 for the 2015 tax year on June 22, 2016, but it was actually due on May 2, 2016. (In 2016, the normal due date of April 30th fell on a Saturday and thus the deadline was extended to the next business day.) The penalty was calculated as $25 per day, times 49 days ($1,225), plus $72.42 in arrears interest, for a total of $1,297.42.
On November 20, 2017, the taxpayer filed a taxpayer relief request under the Income Tax Act, which allows taxpayers to seek discretionary relief from late-filing penalties and arrears interest. In her submission, the taxpayer stated that she filed late because she was away from her home town of Fredericton from February to May 2016, and did not have the necessary documents to file on time. Upon her return, she filed her 2015 form T1135 together with her T1 income tax form. She didn’t owe any tax for 2015.
On October 16, 2018, the CRA informed the taxpayer that her request for relief was being denied because “the circumstances were not beyond the (taxpayer’s) control and the (taxpayer) was responsible for making her own arrangements to ensure she met her filing responsibilities.”
Displeased with this result, the taxpayer requested a second-level review for relief on Nov. 7, 2018. In that request, she raised a new issue, claiming that she had called the CRA on the individual tax enquiries phone number in either February or March 2016 and was told she could file her tax return late as long as she “had no tax owing.” Relying on this information, she filed her 2015 form T1135 late.
On March 21, 2019, the CRA denied the taxpayer’s second request for relief because in the prior year, 2014, the taxpayer had also been assessed a late-filing penalty for filing her form T1135 late and, therefore, “she would have known about her filing obligation for the 2015 Form.” The CRA went on to explain that even without having all of her documents, she could have instead filed an estimated 2015 form T1135 and then amended it once she had her documents.
The taxpayer, feeling that the CRA didn’t properly exercise its discretion to waive her penalties and interest, applied to the Federal Court for a judicial review of the CRA’s decision. The case was heard in Fredericton in November 2019, with the issue before the court being whether the CRA’s decision to refuse the taxpayer’s relief request was “reasonable.”
The Decision
The taxpayer argued before the court that the CRA was partially to blame for her late filing since the CRA “misinformed her about whether there would be a penalty.” She testified that she called the CRA and asked them about the consequences of late-filing her T1 personal tax return. She relied on the advice given over the phone that she would not be assessed a penalty if she filed her tax return late if she did not owe money.
But the judge wasn’t persuaded by her argument, saying that when the taxpayer called the CRA, rather than asking about the T1 return, she could have asked about the treatment of a late-filed T1135. She then would have been advised that a late filing of the T1135 would incur a penalty whether or not you owed money on your T1 for the tax year.
The judge concluded that “it was reasonable for the CRA not to grant a waiver of the penalty for the late filing of the same form two years in a row,” noting that the “teaching moment” the year before “should have illuminated to her the importance of filling the T1135 on time.”
So, as we approach the start of this year’s tax season, keep in mind the importance of filing the T1135 form on time. And, if you run into any newly arrived royals in 2020, you may want to tip them off about their potential tax obligations should they indeed become residents of Canada.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Financial Planning & Advice Group in Toronto.