T1135 Foreign Property and Income Reporting Requirements
In Douglas v. HMQ, 2012 TCC 73, a recent decision by the Tax Court of Canada (TCC) under the informal procedure, the TCC surprisingly accepted the taxpayer’s argument that the penalty imposed under subsection 167(2) of the Income Tax Act (Canada) should be waived for the late-filing of a T1135 form.
In this case, the taxpayer knowingly filed his T1 income tax return along with his T1135 nine months late. He assumed that his failure to file on time would not attract a penalty as he did not owe any taxes for the year. However, the Minister imposed the maximum penalty of $2,500 for the late-filed T1135.
The TCC noted that although a judge-made due diligence defense should be used sparingly, the facts in this case justify such application to waive the T1135 penalty. The Court found that the taxpayer acted reasonably in believing that there would be no penalty since no taxes were owing. Notwithstanding that subsection 167(2) imposes a strict penalty, the TCC held that it would be unfair to penalize the taxpayer in these circumstances.
This decision suggests that a taxpayer may have recourse through the TCC for late-filed T1135 penalties when the taxpayer has exercised “all reasonable measures” to comply with the Income Tax Act.