November 2022 Newsletter

Tax Court cancels penalty for not reporting foreign property

As you probably know, you are required to file a T1135 Foreign Income Verification Statement with your income tax return each year, if you own foreign property that cost you more than $100,000. This includes foreign bank accounts, foreign real estate (except a personal vacation home), and shares of non‑resident corporations.

If you do not file a correct T1135 form, you are subject to a penalty of $25 per day, maximum $2,500 once the return is 100 days late. This penalty applies to each year that you do not file. (If you report false information, knowingly or with gross negligence, the penalty is far higher.)

In the recent Chan case, Mr. Chan did not report a Bank of China account that his father has opened in his name, because he believed it belonged to his father. After his father passed away, the CRA found out about this account (which at this point had about $2 million in it) and assessed Mr. Chan a T1135 non-filing penalty for several years, as well as gross-negligence penalties for not reporting the income earned in the account. Mr. Chan appealed to the Tax Court of Canada.

Mr. Chan explained to the judge that his father had apparently wanted to have this account in China to pursue a legal claim going back to the Chinese civil war in the 1940s. His father kept the bank card and PIN associated with the account, and Mr. Chan never had access to it. He did not know that his father was putting unreported income into the account.

The Tax Court judge believed Mr. Chan’s evidence, and held that he was not the owner of the bank account, so he was not required to report it. And for good measure, the judge wrote: “Should I be wrong” in this conclusion (i.e., if the government were to appeal and the Federal Court of Appeal were to hold the Tax Court was legally wrong), then the judge held that Mr. Chan “had reasonable cause to believe” that his father owned the bank account, and so he had validly made out a “due diligence” defence to the penalties.

As can be seen, these penalties can sometimes be successfully challenged in Court!


De facto director liable for company’s unremitted GST

Under the Income Tax Act, a director of a corporation is liable for the corporation’s unremitted source deductions (payroll deductions) — that is, income tax, CPP and EI withheld from employees’ pay but not remitted to Revenue Canada. A director is also liable for the corporation’s unremitted GST/HST. (There is a “due diligence” defence, where the director shows that he or she exercised due diligence in trying to prevent the corporation from failing to remit.)

Past Court cases have held that this rule applies to a de facto director as well a validly appointed, legal director.

A recent such decision from the Tax Court of Canada is the Lamothe case. Mr. Lamothe was not legally registered as a director of the company in question, which was a janitorial‑services company in Quebec that apparently issued false invoices to allow other companies to falsely claim business expenses and GST input tax credits. However, he was the company’s President, and the company was owned by his brother. He opened the company’s bank accounts, made deposits, and signed cheques for the company.

Mr. Lamothe was assessed as a de facto director for the company’s unremitted GST of some $54,000, plus several years of interest. He appealed to the Tax Court of Canada, arguing that his brother ran the company in question, and he knew almost nothing about it.

The Tax Court judge did not find Mr. Lamothe’s evidence credible, and ruled that Mr. Lamothe exercised sufficient control over the company that he was a de facto director. Thus, he was liable for the unremitted GST plus interest.

Mr. Lamothe has appealed this decision to the Federal Court of Appeal.

Last modified on November 1, 2022 12:00 am
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