Principal Issues: Under a voluntary disclosure, can the CRA waive penalties for T1135 forms that have not been filed for taxation years that end more than 10 years prior to the disclosure?
Position: No.
Reasons: Ss. 220(3.1) does not allow the Minister to waive a late filing penalty under subsection 162(7) for taxation years that end more than 10 years before the voluntary disclosure.
Financial Strategies and Financial Instruments Roundtable, October 9, 2015
2015 APFF Conference
Question 4
Voluntary disclosure where T1135 forms not filed and the 10-year rule
The Voluntary Disclosure Program (the "VDP") promotes compliance with Canada's tax laws by encouraging taxpayers to make voluntary disclosures to correct past omissions in their transactions with the CRA. Taxpayers who make a valid voluntary disclosure will be required to pay taxes, plus interest, without penalties or prosecution to which they would otherwise be subject.
The CRA has legislative authority to provide relief for valid disclosures pursuant to subsection 220(3.1).
In Information Circular IC00-1R4, Voluntary Disclosures Program (VDP), the CRA states in paragraph 13 that, for income tax submissions made on or after January 1, 2005, the Minister’s ability to grant relief is limited to any taxation year (or fiscal period in the case of a partnership) that ended within the previous 10 years before the calendar year in which the submission is filed.
For a disclosure to be valid, it must, among other things, be voluntary, complete, involve the imposition of a penalty and include information whose filing is at least one year late.
Let us suppose the following situation. An individual failed to file Form T1135 - Foreign Income Verification Statement for the years 2000 to 2014 (a total of 15 years). However, during this period, he reported all his foreign–source income referenced in Form T1135.
This individual chooses to use the VDP to regularize his situation with respect to the non-filing of this form. The disclosure is voluntary, a penalty of up to $2,500 per year can be applied and the delay exceeds at least one year. For disclosure to be complete, our understanding is that the individual must provide the information for the 15 years that are covered.
Since the non-filing of Form T1135 covers a period of 15 years, this period exceeds by 5 years the 10-year period during which the Minister has the ability to grant relief.
Questions to the CRA
(a) Can the CRA clarify whether the $2,500 late filing penalty for Form T1135 will automatically be applied for the years 2000 to 2004, given that the 10-year tax time limit has passed? Are there any cases where relief could be granted even if the target years exceed the 10-year threshold?
(b) If the penalties are applicable for the years 2000 to 2004, would it be appropriate from a fairness point of view to limit the "full" character of the voluntary disclosure to a period of 10 years for Form T1135, in particular in cases where all foreign–source income has actually been declared?
CRA Response to Q4(a)
By virtue of subsection 152(4), the Minister can make as assessment, a reassessment or an additional assessment (collectively, an “Assessment”) respecting the tax for a taxation year, as well as interest or penalties, which are payable by the taxpayer in the “normal reassessment period” applicable to the taxpayer for the year. For an individual, the normal reassessment period is three years by virtue of subsection 152(3.1). However, by virtue of paragraph 152(4)(b.1), the limitation period for an individual is extended to six years when a T1135 form (which is prescribed by virtue of subsection 233.3(3)) is not filed within the required period and a sum respecting a foreign property is determined to have not been included in the return of income of the taxpayer.
Furthermore, whether the income from a foreign property has been declared or not, the Minister can assess a taxpayer at any time when such person, or a person filing the declaration, has made a misrepresentation attributable to negligence, neglect or carelessness, or wilful default, or has committed any fraud, in filing a return or supplying any information under the Act. The determination of fraud or misrepresentation depends on the circumstances.
By virtue of subsection 220(3.1), the Minister can waive, in whole or in part, an amount of penalty or interest otherwise payable by a taxpayer for a taxation year when the taxpayer has made an application, at the latest, on the day which is 10 calendar years after the end of the taxation year (the “10-Year Limit”).
Subsection 220(3.1) does not permit the CRA to waive a penalty or interest for years beyond the 10-Year Limit (2000 to 2004, in your example). The current position of the CRA is that the late-filing penalty of $2,500 under subsection 162(7) applies automatically. However, this position is currently under study.
CRA Response to Q4(b)
As is stated in paragraph 35 of Information Circular IC00-1R4, the “taxpayer must provide full and accurate facts and documentation for all taxation years or reporting periods where there was previously inaccurate, incomplete or unreported information relating to any and all tax accounts with which the taxpayer is associated.” However, paragraph 37 of this Circular indicates as follows: “While the information provided in a disclosure must be complete, the disclosure may not be disqualified simply because it contains minor errors or omissions. Each submission will be reviewed on its own merits.”
Yves Grondin
2015-058897