Principal Issues: Other than this VDP, is there another program or alternative to allow a delinquent taxpayer to avoid the penalty for failure to file or late filing Form T1135 in certain circumstances?
Position: For the time being, subject to the current legislation, the CRA is required to apply the penalty in subsection 162(7). No mechanism is specifically provided to avoid the penalty.
Reasons: Income Tax Act
Financial Strategies and Financial Instruments Roundtable, 5 October 2012
2012 APFF Conference
Question 20 - Form T1135: return of the problem of forms not filed on time
Both at the 2009 and 2010 APFF Conference Roundtables, practitioners questioned the Department of Finance of Canada about the possibility of amending the legislation with respect to the definition of "specified foreign property".
Briefly, under section 233.3, there are rules to force the filing of Form T1135 by a taxpayer (individual, trust, corporation) or partnership for the year or period where, at any time, the taxpayer holds "specified foreign property" whose total cost amount exceeds $100,000. Under the definition of "specified foreign property" in subsection 233.3(1), this includes shares of the capital stock of a non-resident corporation regardless of whether they are held through a securities brokerage firm in Canada or abroad.
In the real world, the vast majority of taxpayers coming within the T1135 filing requirement are individuals or holding corporations that hold, as "specified foreign property", shares of large publicly traded corporations listed on the New York Stock Exchange through a securities brokerage firm in Canada or a portfolio manager established in Canada. T5 forms in respect of dividends received on such shares or T5008 forms in respect of the disposition of such securities are therefore sent by Canadian brokerage firms to taxpayers holding such securities listed on the New York Stock Exchange. In short, the information that the tax authorities wish to obtain is already tracked via forms produced by the brokerage firms and which are also reproduced in certain appendices of tax returns (T1, T2 or T3).
On the other hand, failure to file Form T1135 can result in costly penalties. Already, a significant number of accountants and preparers have suffered the wrath of their clients, because the T1135 form was omitted or filed late and penalties were applied by the CRA. Yet, there is a strong desire in the federal government to reduce red tape for small businesses, and the federal government has introduced a specific program in this regard.
In addition, the Voluntary Disclosures Program ("VDP") is experiencing real congestion because of this rule, which causes a considerable loss of time and most importantly, it significantly distances the VDP from its primary mission. Note that using the VDP is currently the only way to avoid the $2,500 penalty. In short, this results in a notorious inefficiency for both CRA employees and practitioners. Also note that practitioners must file Form T1135 in "paper" form only and not in an electronic version, another source of frustration.
A large number of T1135 forms are, in fact, unnecessarily filed with the CRA as it already has a lot of information about the securities in question via the T5 and T5008 forms. In addition, other financial products with "similar" tax effects, such as Canadian mutual funds investing solely in US equities, are not covered by such a disclosure on Form T1135.
Although the Department of Finance indicated both in 2009 and 2010 its intention to address the APFF's recommendation to amend the definition of "specified foreign property", no known development has resulted, and the problems have not decreased. There are now some court decisions on the T1135, including a decision in March 2012 in the case of Douglas v. The Queen (footnote 1), which was favorable to the taxpayer in his particular situation, which however was rendered under the informal procedure.
Questions to the CRA
1. Can the CRA give its position on the Douglas decision?
2. Is the CRA prepared to consider another avenue (such as the use of relief provisions) to allow a taxpayer to avoid the penalty of up to $2,500 a year without having to go through the VDP?
CRA Response
1. The CRA has considered the Douglas decision. However, that case proceeded under the informal procedure and on that basis, the CRA is not bound by that decision.
2. For the time being, having regard to the current legislation, the CRA is bound to apply the penalty provided in subsection 162(7). No specific mechanism is provided to avoid the penalty.
However, the VDP will continue to administer requests from taxpayers seeking relief from the penalties that have been applied to late filings.
All conditions of the VDP must be satisfied, as in all other cases of voluntary disclosure, for the relief to be considered.
Each disclosure must satisfy these four conditions:
1. is voluntary,
2. is complete,
3. engages the imposition or potential imposition of a penalty, and
4. comprises information that is more than a year overdue.
On the other hand, if a taxpayer judges, once the assessment is made, that circumstances beyond the taxpayer’s control, actions of the CRA, an inability to pay, or financial hardship prevented the taxpayer from complying with the Income Tax Act, the taxpayer may apply for relief under subsection 220(3.1). Each request for relief is analyzed individually, on a case by case basis. The following four factors will be considered in the CRA's analysis to determine whether or not the penalty and interest may or may not be waived:
1. the taxpayer has, in the past, fulfilled the taxpayer’s tax obligations,
2. the taxpayer knowingly left an outstanding balance that resulted in interest on arrears,
3. the taxpayer has made reasonable efforts and has not been negligent in the taxpayer’s conduct of the taxpayer’s affairs under self-assessment regime; and
4. the taxpayer has acted diligently to remedy any delay or omission.
Nancy Turgeon CPA, CGA
(613) 957-2123
2012-045321
October 5, 2012
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2012 TCC 73 ("Douglas")