Why the CRA penalized a taxpayer for late filing even though he owed no tax

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Photo by Spencer Colby/Postmedia filesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.If you file your tax return late, you will generally only face a penalty if there is an amount owing on your return. But, if you happen to own certain foreign property, you can be hit with a late-filing penalty from the Canada Revenue Agency for simply failing to file Form T1135, the Foreign Income Verification Statement, on time.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThis form is required if you own “specified foreign property” where the total cost amount of all such property, at any time in the year, was more than $100,000. Foreign property includes such assets as a U.S. bank account, as well as shares of foreign corporations if held in a non-registered account. Personal use property, such as a Miami vacation condo, is excluded, as are any assets held in registered accounts.This advertisement has not loaded yet, but your article continues below.The penalty for failing to file the form on time is $25 per day, to a maximum of $2,500, plus arrears interest. If you’re assessed a penalty, you can write to the CRA requesting relief when events “beyond your control” prevent you from filing on time. If the CRA denies your request for relief, you can then take the matter to federal court where a judge will decide whether the CRA officer’s decision to deny relief was reasonable.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againA July 2026 federal court decision dealt with a couple who faced penalties for failing to file their 2021 T1135s on time. They claimed the delay was the result of their reliance “on misleading and incomplete information from the CRA.”The taxpayer owns commercial property in the U.S. through various limited liability partnerships from which he earns rental income. His wife also has investments in the U.S.In 2020, the taxpayer sold one of his properties, which resulted in a capital gain. While preparing his 2020 tax return, his accountant calculated the capital gain on the sale, but the taxpayer believed the estimate was “significantly inflated.” To avoid penalties and interest for late-filing their returns, the taxpayer and his spouse nevertheless filed their 2020 income tax returns based on the higher figure, relying on the accountant’s assurance that they could adjust their 2020 returns later to reflect the correct capital gain.This advertisement has not loaded yet, but your article continues below.And, in April 2022, that’s exactly what the taxpayer did, filing a T1 Adjustment Request for the 2020 tax year that reduced his capital gain. Consequently, this allowed the taxpayer to lower his 2020 RRSP deduction, thereby freeing up unused RRSP contribution room to carry forward and deduct in 2021.Later that month, the taxpayer reached out to the CRA to check the status of his 2020 adjustment. As his 2020 reassessment was still pending, he was advised by a CRA agent simply to submit his 2021 tax return on time without claiming the newly freed-up RRSP carryforward room, which would not yet be reflected in the CRA’s systems. He was then told that once he received both the 2020 and 2021 notices of (re)assessment, he could file a new adjustment request for the 2021 tax year, amending his RRSP deduction claim.Hoping to avoid submitting another adjustment request for 2021, the taxpayer decided that he would instead wait for his 2020 reassessment, and simply file the couple’s 2021 returns late. He reached out to the CRA and asked about the consequences of late-filing, and was told by a CRA agent that “penalties are charged if you file your return late and have a balance owing.”This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.As a result, the April 30, 2022, tax filing deadline came and went, and the taxpayer hadn’t yet filed his or his wife’s 2021 returns. April 30 was also the deadline for filing their T1135 forms to report ownership of foreign property.In July 2022 the taxpayer received his 2020 notice of reassessment and in mid-December 2022, nearly eight months after the April 30 deadline, the taxpayer and his wife filed their 2021 returns, along with their T1135 forms. Neither owed taxes for 2021 and both received refunds.In January 2023, the CRA issued notices of assessment for the 2021 tax year, and assessed a penalty of $2,500 to each of them, plus arrears interest, for late-filing their T1135s.The taxpayer wrote to the CRA asking for penalty relief, but was denied. He requested a second-level review, noting that he had specifically asked the CRA about late-filing penalties and “was assured that unless I owe tax, there would be no penalty.” He asserted that “the CRA website and the Federal Income Tax and Benefit Guide are deceiving” because the Penalties section only states that CRA may charge a penalty if you “1) file your return late and owe tax, 2) failed to report an amount, or 3) made a false statement or omission.” None of these reasons applied to his situation.This advertisement has not loaded yet, but your article continues below.He further argued that the fact that a specific form can have its own separate penalty is “not ‘general knowledge’ but rather specific knowledge.” He concluded that the “CRA has made it virtually impossible to become aware of that fact unless you already know that specific forms may incur a penalty and specifically look up the form.”In July 2024, the second-level CRA agent denied the taxpayer’s request for relief. As the agent wrote, “Oversight, lack of knowledge, or unintentional error are not considered circumstances beyond a taxpayer’s control.”The taxpayer decided to take the matter to court, seeking a judicial review by a federal court judge, whose role it is to determine whether the CRA officer’s decision not to grant relief was reasonable.The taxpayer relied on two main arguments: that he was misled by the information received from a CRA agent and that the information available on the CRA website made it “virtually impossible” to know if there was a specific penalty for the late filing of Form T1135.In court, the taxpayer acknowledged that during his phone call with the CRA about penalties, he did not mention form T1135 and only asked if there would be a penalty if he waited for the result of his 2020 T1 adjustment request and filed his 2021 tax return late so as to use the correct RRSP deduction amount.This advertisement has not loaded yet, but your article continues below.As for the taxpayer’s claim that the T1135 penalty information was not “readily available” on the CRA’s website, the taxpayer was alluding to the fact that he would have had to click through multiple hyperlinks to find the relevant information.The judge found the taxpayer’s arguments unpersuasive and concluded that the CRA officer’s decision not to grant relief was, indeed, reasonable, dismissing the taxpayer’s case.Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.If you liked this story, sign up for more in the FP Investor newsletter.This advertisement has not loaded yet.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.