As globalization continues to expand, more Canadians are investing in foreign properties. However, with these investments comes the responsibility of adhering to tax regulations set forth by the Canada Revenue Agency (CRA). One critical requirement is reporting foreign property on Form T1135, the “Foreign Income Verification Statement.” Failure to comply can result in significant penalties. In this article, we will outline the penalties for failing to report foreign property or providing inaccurate information on Form T1135.

The Importance of Form T1135

Form T1135 is a mandatory disclosure form for Canadian residents who own specified foreign property valued at more than CAD 100,000 at any time during the year. Specified foreign properties include:

  • Funds held in foreign bank accounts
  • Shares in foreign corporations
  • Interests in non-resident trusts
  • Real estate located outside Canada (excluding personal use properties)
  • Other foreign investments

The purpose of this form is to ensure that all income earned on foreign properties is reported and taxed appropriately. It also helps the CRA track and combat tax evasion.

Also read: How to Report Foreign Property in Canada

Penalties for Non-Compliance

The CRA imposes strict penalties for failing to file Form T1135 or for inaccuracies in the information provided. These penalties can be categorized into two main types: general penalties for late filing and penalties for gross negligence.

1. General Penalties for Late Filing

If a taxpayer fails to file Form T1135 by the due date, the CRA can assess a penalty of $25 per day for each day the form is late. This penalty can accrue for up to 100 days, resulting in a maximum penalty of $2,500. The minimum penalty for late filing is $100. This means that the penalty can range from a minimum of $100 to a maximum of $2,500. This penalty structure aims to encourage timely compliance without imposing overly harsh fines for minor delays.

For example, if you are 50 days late in filing Form T1135, the penalty would be calculated as follows:
Penalty = 50 days × $25=$1,250

2. Penalties for Gross Negligence

The CRA defines gross negligence as a willful disregard of the obligation to report foreign property. Penalties for gross negligence are significantly more severe to reflect the intentional nature of the non-compliance.
In cases where the taxpayer has failed to file Form T1135 for an extended period or has provided inaccurate information, the CRA may impose penalties for gross negligence. These penalties are significantly more severe and are intended to deter non-compliance.

The penalty for gross negligence is 5% of the cost of the unreported foreign property for each month the failure continues, up to a maximum of 100% of the property’s cost.

For instance, if the cost of the unreported foreign property is CAD 200,000 and it remains unreported for 12 months, the penalty calculation would be:

Penalty per month=5%×$200,000=$10,000
Total Penalty=12months×$10,000=$120,000

However, since the penalty is capped at 100% of the property’s cost, the maximum penalty would be CAD 200,000.

Also read: How is foreign property reported?

Additional Consequences of Non-Compliance

Beyond the financial penalties, there are several other potential consequences for failing to report foreign property accurately and on time:

1. Audits and Investigations
The CRA may initiate a thorough audit of your financial affairs if they suspect non-compliance. This process can be time-consuming, stressful, and invasive, requiring you to provide detailed documentation and explanations for your financial transactions and holdings.

2. Increased Scrutiny
Repeated non-compliance or significant omissions can lead to increased scrutiny from the CRA. This could result in more frequent audits and a closer examination of all your tax filings, not just those related to foreign property.

3. Legal Action
In extreme cases, particularly where there is evidence of intentional tax evasion, the CRA can pursue criminal charges. Convictions can result in substantial fines and even imprisonment.

4. Reassessment of Tax Returns
The CRA has the authority to reassess your tax returns for any years in which you failed to report foreign property. This could lead to additional taxes owed, along with interest and penalties on the overdue amounts.

Also read: Understanding Foreign Property

How to Avoid Penalties

To avoid these severe penalties, it is crucial to:

Understand Your Obligations: Be aware of the reporting requirements for foreign properties and ensure you are compliant.

File Timely and Accurate Reports: Submit Form T1135 on time and ensure all information provided is accurate and complete.

Seek Professional Advice: If you have complex foreign investments, consider consulting a tax professional to ensure compliance with CRA regulations.

Also read: Reporting Foreign Property on Your Taxes

The penalties for failing to report foreign property or providing inaccurate information on Form T1135 can be substantial, ranging from daily penalties for late filing to severe penalties for gross negligence. To avoid these penalties, it is essential to stay informed about your reporting obligations and ensure timely and accurate filings. By doing so, you can safeguard yourself from significant financial and legal repercussions, ensuring that your foreign investments remain a beneficial part of your financial portfolio.