Principal Issues: Where a taxpayer has failed to file a T1135 or has failed to include an amount on the T1135 because the taxpayer relied on the wording of the T1135 (which does not reflect the more narrow exclusion for foreign affiliates) will the CRA pursue the taxpayer for penalties in respect of the failure?
Position: At this time, the CRA is in the process of consulting internal stakeholders to evaluate and potentially develop a position on this issue, while giving consideration to the impacts on other foreign reporting forms.
2021 Canadian Tax Foundation Conference
CRA Roundtable
Question 14: Failure to properly file a T1135 and Section 233.4
Generally, under section 233.3, every taxpayer owning “specified foreign property” with a total cost amount greater than $100,000 is required to file a Form T1135 in respect of each of its taxation years in which the $100,000 total is exceeded.
The definition of “specified foreign property” in subsection 233.3(1) includes, under paragraphs (c) and (g), a share of the capital stock of, or indebtedness owed by, a non-resident corporation. However, a share of the capital stock or indebtedness of a non-resident corporation that is a foreign affiliate of the taxpayer for the purposes of section 233.4 is excluded from the definition of “specified foreign property” under paragraph (k) of that definition. Therefore, a taxpayer is not required to report a share or indebtedness of an entity that is a foreign affiliate for purposes of section 233.4 on a T1135.
Subsection 233.4(2) has special rules for determining whether a non-resident corporation is a foreign affiliate of the taxpayer for purposes of section 233.4. Those rules narrow the definition of “foreign affiliate” such that an entity that is a foreign affiliate for other purposes of the ITA may not be a “foreign affiliate” for purposes of section 233.4.
Example
1. Canadian parent (“Parent”) owns 100% of the shares of Canadian subsidiary (“Cansub”).
2. Cansub owns 100% of the shares of a non-resident corporation (“NRco”).
3. NRco is a “foreign affiliate” of both Parent and Cansub under the definition of “foreign affiliate” that applies generally for the purposes of the ITA. However, under the restricted definition of “foreign affiliate” that applies for purposes of section 233.4, NRco is only a foreign affiliate of Cansub.
As the restricted definition of “foreign affiliate” in section 233.4 applies for purposes of the exception to the definition of “specified foreign property” referred to above, if Parent held indebtedness owing by NRco, it would have to report that indebtedness on a T1135 while if the same indebtedness were held by Cansub, it would not have to report the indebtedness on a T1135.
The instructions on the T1135 form advise taxpayers not to include shares of the capital stock or indebtedness of a “foreign affiliate”. The T1135 form does not indicate that the term “foreign affiliate” for the purposes of the T1135 has a different, much narrower meaning, than that term has for other purposes of the ITA. The instructions include the following under the heading “What property do you have to report?”:
Specified foreign property does not include:
•a share of the capital stock or indebtedness of a foreign affiliate;
Under the heading “Tables”, we find the following specific instructions for the table where we are to report “indebtedness owed by non-residents”:
Report all amounts owed to you by a non-resident person (other than a foreign affiliate corporation)…
As a result, a taxpayer looking at the T1135 form is led to believe that the broad definition of “foreign affiliate” that applies for the purposes of the ITA also applies for the purposes of the T1135. In such case, the taxpayer may conclude that the CRA does not require a particular indebtedness held by the taxpayer to be reported on the T1135 even though the statute calls for its inclusion or they may simply be unaware of the separate definition of “foreign affiliate” because the T1135 form makes no mention of it.
Where a taxpayer has failed to file a T1135 or has failed to include an amount on the T1135 because the taxpayer relied on the wording of the T1135 (which does not reflect the more narrow exclusion for foreign affiliates) will the CRA pursue the taxpayer for penalties in respect of the failure?
CRA Response
The Income Tax Act (Act) imposes an obligation on all Canadian resident taxpayers to file Form T1135, Foreign Income Verification Statement, if at any time during the year, the total cost amount of all specified foreign property to the taxpayer was more than $100,000 (Canadian).
The term “specified foreign property” is defined in subsection 233.3(1) of the Act with certain exceptions including a share of the capital stock or indebtedness of a non-resident corporation or an interest in or indebtedness of a non-resident trust that is a foreign affiliate of the person or partnership for the purpose of section 233.4 of the Act.
Section 233.3 of the Act does not exclude from reporting on Form T1135 investments in all foreign affiliates, but only the investments in non-resident corporations or non-resident trusts that are foreign affiliates for the purpose of section 233.4. The instructions on Form T1135 do not specifically refer to the definition of “foreign affiliate” as modified by section 233.4 of the Act. We recognise that there may be circumstances where this could lead to some misinterpretation or confusion by a taxpayer and may result in their failure to file Form T1135 or disclose the foreign affiliate as required by the Act.
Taxpayers who may have been assessed penalties (such as those provided by subsections 162(5), 162(7), 162(10), 162(10.1) and 163(2.4)) as the result of late or incorrectly filing of Form T1135 and are of the view that the late or incorrect filing was the result of the form’s lack of clarity regarding transactions with foreign affiliates, may make an application for relief of interest (such as the interest applicable under subsection 161(11)) and penalties under the CRA’s fairness provisions. Subsection 220(3.1) of the Act provides the Minister with the discretion to waive or cancel all or any portion of any penalties and interest otherwise payable under the Act. All the relevant facts and circumstances of a taxpayer’s situation will be reviewed and each request will be decided on its individual merits. For more information on existing taxpayer relief provisions, including the administrative guidelines that the CRA applies when considering requests for relief and the types of circumstances that may qualify, please consult Information Circular, IC07-1R1, Taxpayer Relief Provisions.
Under Canada’s self-assessment system, the CRA encourages taxpayers to come forward and voluntarily correct their tax affairs by either submitting taxpayer requested adjustments to correct past filing errors or through application to the Voluntary Disclosures Program (VDP), should the taxpayer meet the program’s eligibility criteria.
Additional information in regard to the VDP can be found at www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/voluntary-disclosures-program-overview.html.
At this time, the CRA is in the process of consulting internal stakeholders to evaluate and potentially develop a position on this issue, while giving consideration to the impacts on other foreign reporting forms.
The CRA regularly reviews and updates its forms and publications to clarify ambiguities that may have been identified and to enhance compliance through more effective foreign reporting. The CRA will consider changes to clarify instructions on the T1135 form that may be required to avoid uncertainty.
Response prepared by:
Jim Vickers
ATP Workload Development Section
Compliance Programs Branch
2021-091195
November 25, 2021