CRA hits taxpayer with hefty ‘overseas property’ penalty

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As you start to arrange your 2024 tax return within the days forward, you need to pay shut consideration to a seemingly innocuous query on web page 2 of the return. The query asks whether or not you owned or held “specified overseas property” the place the whole price quantity of all such property, at any time in 2024, was greater than $100,000. If the reply is sure, the return instructs you to finish Type T1135, International Earnings Verification Assertion.

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There are substantial penalties for failure to file this way, as one taxpayer not too long ago discovered in a tax case determined final month. However earlier than delving into the small print of this newest T1135 penalty case, let’s briefly assessment the overseas property reporting guidelines.

Specified overseas property consists of apparent overseas property, equivalent to a Bahamian checking account or Bermudian offshore funding portfolio, in addition to valuable metals held outdoors Canada. Additionally included are overseas shares, equivalent to Apple Inc., Microsoft Corp. or Meta Platforms Inc., debt of a non-resident issuer, or an curiosity in a non-resident belief held in a Canadian, non-registered brokerage account. Choices to buy specified overseas property are additionally included.

When you maintain overseas securities in a Canadian brokerage account, take into account the residency of the issuer of the safety. If the issuer is a non-resident of Canada, then the securities rely as specified overseas property. Word that it’s irrelevant whether or not the safety is listed on a Canadian or overseas inventory alternate, or if the safety is denominated in Canadian or overseas forex.

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Some overseas property don’t should be reported. For instance, overseas securities held inside Canadian pooled merchandise, equivalent to Canadian mutual funds, needn’t be reported; nonetheless, for those who put money into a non-resident mutual fund or exchange-traded fund (ETF), then that’s overseas property. A overseas forex checking account held with a financial institution in Canada equivalent to a U.S. greenback chequing account isn’t thought-about specified overseas property, nor are U.S. money balances sitting in your non-registered Canadian brokerage buying and selling account. Solely money in offshore accounts, as an illustration an Arizona chequing account, is reportable overseas property.

When you personal a overseas trip residence, equivalent to a rental in Costa Rica, it’s excluded supplied it’s primarily on your private use. A rental property positioned outdoors of Canada would, nonetheless, be included in property to be reported.

Lastly, property held in registered plans, equivalent to a registered retirement financial savings plan (RRSP), registered retirement revenue fund (RRIF) or tax-free financial savings account (TFSA), in addition to overseas property used solely in carrying on an lively enterprise, needn’t be reported.

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In case you are required to file a T1135, it’s essential that you simply file on time or threat a late-filing penalty of $25 per day to a most of $2,500, plus arrears curiosity. If, nonetheless, you fail to file the T1135 “knowingly or beneath circumstances amounting to gross negligence,” the penalty jumps to $500 per thirty days for every month that the return is late, to a most of $12,000. After 24 months, the penalty turns into 5 per cent of the price of the overseas property, much less any penalties already assessed.

This newest T1135 case concerned a taxpayer who uncared for to file T1135s for the years 1998 via 2013, and was hit with gross negligence penalties and curiosity for every of these tax years.

The taxpayer had a bachelor of science in mining engineering and was an expert engineer. He labored in Canada from 1979 to 1982, after which labored in Libya as an engineering supervisor till 1994.

In April 1997, when the taxpayer was considering his return to Canada, he opened a Swiss checking account and funded it with the equal of $431,000 in Canadian {dollars} that he had earned in Libya. It was a numbered Swiss account and, for a charge, the Swiss financial institution held all associated documentation. All enterprise transacted between the taxpayer and the Swiss financial institution was by phone. He opened the Swiss checking account to cover the funds from his spouse, with whom he was having marital difficulties. He was involved that he would quickly be divorced so he needed to maintain cash offshore to fund his potential post-divorce life.

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The taxpayer finally returned to Canada and have become a Canadian resident for revenue tax functions. He didn’t report any of the revenue, positive aspects or losses for the Swiss checking account in his tax returns for any of the 1998 to 2013 taxation years, nor did he file T1135s for these years.

The CRA reassessed the taxpayer for these taxation years to incorporate in his revenue quantities in reference to the Swiss checking account, and imposed each gross negligence penalties, and penalties for the failure to file T1135 varieties.

For every year from 1998 to 2013, the taxpayer’s accountant ready his revenue tax return based mostly on the paperwork supplied by him. The taxpayer didn’t disclose the existence of the Swiss checking account to his accountant, nor did he present his accountant any documentation in relation to the account for these taxation years.

The taxpayer testified that he believed that since he had earned the cash used to fund the Swiss checking account whereas he was working in Libya, it was not taxable in Canada. He referred to provisions in two of Canada’s revenue tax treaties that present the complexity of the taxation of internationally earned revenue. He additionally argued that he had understood that the Swiss financial institution was taking good care of any tax related to that account. This was constant together with his expertise in Libya, the place his employer took care of all taxes.

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The choose didn’t purchase the taxpayer’s explanations, saying, “None of those causes are convincing.” Added the choose, “This isn’t a scenario the place it may very well be stated that the taxpayer was misled by their tax preparer. It was not a fancy construction or an arcane level of tax regulation — the taxation of Canadian residents on their worldwide revenue is likely one of the foundational guidelines of Canadian revenue tax regulation.”

Accordingly, the choose discovered that the taxpayer didn’t file a T1135 type for every of the 2007 to 2013 taxation years “knowingly or beneath circumstances amounting to gross negligence,” and that the CRA correctly assessed the gross negligence penalties for failure to file every year’s T1135.

Even for these of us with out Swiss financial institution accounts, this case serves as an essential reminder to fill out the T1135 yearly, even when it’s merely to report the U.S. securities in our Canadian brokerage account.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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