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The Problem with Penalties

The Canada Revenue Agency seems more and more willing to impose penalties for all sorts of perceived transgressions. We've talked about penalties in a previous blog post ( ).

One that seems to be a trap for the unwary and can be very unfair is the penalty for failure to report ownership of foreign assets having an aggregate cost of over $100,000.

Under s.233.3 of the Income Tax Act, a person must file a special return if they own foreign assets having an aggregate cost of over $100,000. The foreign assets are referred to as “specified foreign property” and include cash, bank accounts, investments, shares, an interest in a trust, and loans to foreigners. It does not include strictly personal use assets such as a vacation home or vehicles.

In my experience, this rule is not well understood by most Canadians. Even though there is a yes/no question about foreign assets at the top of the T1 personal tax return, it is often missed by the taxpayer or not raised by the tax preparer.

I have been involved in numerous situations where a client has come to me because they have been contacted by the CRA to provide details of foreign assets and have threatened penalties for failing to file the required T1135 tax return each year.

While the CRA needs to ensure that Canadians report the income they earn from foreign investments, the unfairness can arise because sometimes these assets have not generated any income. Even if there is no income to report, a person can still be assessed for failure to report the ownership of the assets.

If you are an individual taxpayer, the T1135 has to be filed annually on or before the date that your regular T1 personal tax return needs to be filed.

If you don’t file it on time, the penalty is equal to the greater of $100 and $25 per day (to a maximum of $2500 per year).

If for example both you and your spouse have a joint bank account or investment account, you could each be assessed the penalties. So a couple could be facing penalties of $5,000 per year.

In addition, it’s not uncommon for the CRA to go back 6 years or more. So for 6 years you and your spouse could be facing penalties of $30,000 or more.

This is in addition to taxes, interest and penalties that you can face if you have any unreported income earned in that account.

So it seems quite out of proportion and unfair to hit a couple with these kinds of penalties just because they didn’t know the law and they inadvertently failed to file the T1135 forms each year. Imagine you and your spouse have a foreign investment account with $200,000 in it and it has never earned any income (or has in fact lost money). You could be facing a $30,000 penalty.

It doesn’t seem fair.

In such circumstances, we may be able to help. We may be able to limit the number of years or to advance a due diligence defence on your behalf.

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