If you own “specified foreign property” and its total cost at any time during the year exceeded $100,000 Canadian dollars, you must complete Form T1135, Foreign Income Verification Statement, on your personal tax return.
While most people agree that Swiss bank accounts with a value exceeding $100,000 Canadian dollars should be reported, you may not realize that stock in foreign companies like Apple Inc. or Nvidia Corp., even if held through a non-registered broker-dealer in Canada, must also be reported. Failure to report foreign assets on the T1135 can result in a late filing penalty of $25 per day, up to $2,500 Canadian dollars, plus interest on the balance owed for each tax year not reported.
That’s exactly what happened to one Ontario taxpayer, who was fined $2,500 each for failing to file Form T1135 for the 2019 and 2020 tax years. She appealed the decision, and the case was heard in the Tax Court in September.
During the trial, the taxpayer admitted that she did need to file Form T1135 and did file it late, but she believed that she had “exercised due diligence” in preparing her tax return and therefore should not be fined. The judge noted that taxpayers can prove they met the “duty of care” standard in two ways. First, they can prove they took reasonable precautions to avoid the event that gave rise to the penalty. Second, they can prove they misunderstood the facts and that a reasonable person would have made the same mistake had they known the true circumstances.
Unfortunately, this wasn’t the first time she had failed to file the required T1135 form.
The taxpayer, a U.S. citizen, realized she hadn’t filed her U.S. tax return after her father passed away in 2012. She hired an accountant to file both her Canadian and U.S. returns. The accountant discovered that she should have filed Form T1135 for the 2012, 2013, and 2014 tax years.
In 2015, her accountant submitted a voluntary disclosure to the Canada Revenue Agency on her behalf. The disclosure stated that she had not filed her T1135 on time because she “mistakenly believed that foreign assets held in her Canadian brokerage account were not considered foreign property.” The Canada Revenue Agency accepted the voluntary disclosure, and she avoided a $2,500 annual penalty.
In 2018, she renounced her U.S. citizenship, believing she no longer needed to file U.S. tax returns, so she stopped hiring an accountant and only filed Canadian taxes on her own. This decision later proved to be costly.
When she filed her 2018 tax return, she looked up the definition of “foreign property” because she was concerned that the U.S. individual retirement account (IRA) she inherited from her father might qualify. Finding the explanation in the tax software she used confusing; she turned to Google for answers.
When she looked up information about her IRA, she didn’t see any notice that she needed to factor in the cost of her U.S. investments in her Canadian brokerage account on her T1135. Therefore, she didn’t verify whether her foreign investment costs exceeded $100,000 in 2018. The fact that they didn’t was a “lucky coincidence,” the judge called it.
In 2019, she changed brokers, and the new broker adopted a new investment strategy that required her to sell a significant portion of her old investments and purchase new ones. As a result, the cost of her foreign property exceeded $100,000, triggering the requirement to file a T1135 again. However, when she prepared her 2019 and 2020 tax returns on her own, she used the 2018 assumption that she did not need to file T1135 and did not recheck.
It wasn’t until she was preparing her 2021 tax return that she received a special foreign asset report from her new brokerage and realized she should have filed T1135s for both 2019 and 2020. She tried to make another voluntary disclosure, but the Canada Revenue Agency denied it because she had already made a voluntary disclosure on the same issue.
The judge expressed sympathy for her, calling her a “responsible taxpayer” who “reported and paid taxes on time.” He also noted that “it is somewhat counterintuitive that U.S. investments held in Canadian brokerage accounts are considered foreign property, especially when they are held in RRSPs or RRIFs, which are not considered foreign property.”
In other circumstances, the judge might find that a reasonable person would make the same mistake she did. But the key question is: would a reasonable person make the same mistake again if they had made it before and avoided punishment by voluntarily disclosing it?
The judge concluded: No. A reasonable person, after the first mistake, would have been highly alert to the risks of foreign asset reporting and “would have taken prudent steps to ensure that they did not fall into the same trap again.”
She did the exact opposite: she stopped hiring an accountant and returned to filing her own taxes. The judge pointed out that she certainly didn’t have to continue hiring an accountant, but since she had resumed filing her own taxes, she should be more vigilant.
Ultimately, the judge dismissed her appeal and upheld the Canada Revenue Agency’s ruling on the T1135 late filing penalty for 2019 and 2020. She must pay the Canada Revenue Agency’s $5,000 fine.