Principal Issues: Whether a prescribed form which is filed without the required information and/or documentation would be subject to a penalty, even though it was filed on or before the filing deadline?
Position: Yes, subsection 162(7) or 162(5) would apply depending on whether the missing information affects the substance of the form.
Reasons: In situations such that the prescribed form is substantially incomplete, whether missing relevant information or required documents, the form may be considered as invalid and will not be accepted as filed, and the penalty provided by subsection 162(7) for the failure to file the information return as and when required by the Act would be applicable. In situations where the form is filed prior to the filing deadline, but it is missing information which does not affect the substance of the form, a penalty provided by subsection 162(5) is applicable for the failure to provide information required on a prescribed form.
December 6, 2012
Non-resident Trusts and Foreign Investment HEADQUARTERS
Entities Section Income Tax Rulings
International and Large Business Directorate Directorate
Attention: Lynda Gibson, Manager Gillian Godson
2012-045840
Application of Subsection 162(7) to Incomplete Foreign Reporting Forms
We are writing in reply to your email of August 10, 2012, regarding the application of the penalties provided by section 162 of the Income Tax Act (the "Act") with respect to foreign reporting forms. Specifically, you have asked whether the penalty under subsection 162(7) for the failure to file an information return as and when required by the Act or Income Tax Regulations (the "Regulations") is applicable to a foreign reporting form that is filed on time, but is incomplete and/or missing required documentation.
In general, sections 233.1 to 233.6 of the Act provide the foreign reporting requirements in various circumstances, such as non-arm's length transactions with non-residents, loans or transfers to a non-resident trust, ownership of specified foreign property, and reporting with respect to foreign affiliates. As outlined in your inquiry to us, all required foreign reporting forms (such as the T106, T1134, T1135, T1141, and T1142) are received by the Ottawa Technology Centre (the "OTC"). For compliance and reporting purposes, the required information provided by the forms is entered into the Foreign Reporting Requirements Management System (FRRMS) by the OTC. The importance of this information is emphasized by the fact noted in your enquiry that the information from the FRRMS provides the main risk assessment tool for Aggressive Tax Planning and international auditors.
The issue you have identified in your inquiry is that a material number of foreign reporting forms are received by the OTC without the required information (for example, information missing from areas of the form and/or without attaching required information to the form). The OTC staff must respond to the incomplete forms with a letter requesting the required information, and follow-up to ensure the information is provided. This process is time consuming, inefficient, and delays the input of data into the FRRMS.
Currently, you have stated that the penalties provided by section 162 of the Act are not applied in circumstances where the incomplete foreign reporting forms are received prior to the filing deadline. In addition, due to the requirement to establish gross negligence, the penalties provided by 163(2) are not being considered in these situations. You have requested our opinion on whether consideration could be made to the application of the penalties provided by subsections 162(5) and 162(7) to the incomplete foreign reporting forms in order to facilitate compliance.
Our Comments
In general, the penalties under the provisions of section 162 of the Act are applicable to foreign reporting forms where the form is late, incomplete or in circumstances where the required documents have not been submitted with the form. In particular, subsection 162(5) provides that every person who fails to provide the information required on a prescribed form is liable to a penalty. The penalty for the failure to provide the information is $100, and is applicable to each such failure. Accordingly, the penalty would be applied to each prescribed form that is missing any of the required information and/or documentation. Therefore, in response to your question raised in your inquiry, in a situation where a taxpayer has failed to provide multiple pieces of required information on one prescribed form, in our view the failure would be considered as one failure to provide the required information. It is also our view that the definition of the word "information", as it is used in this provision, has the meaning of a collection of facts or data. Therefore, the failure to provide information cannot be thought of as many singular failures to provide pieces of information, but rather a single failure to provide a complete set of the required facts or data.
In addition, although subsection 162(5) of the Act provides a penalty for the failure to provide information on a prescribed form, paragraph 162(7)(a) also provides a penalty for a similar failure. The penalty provided by paragraph 162(7)(a) is applicable in situations where there has been a failure to file an information return as and when required by the Act or the Regulations, except where another provision of the Act sets out a penalty for the failure. In that regard, if a prescribed form is filed without the required information or documentation, it may also be considered to have not been filed as required by the Act. The penalty provided by paragraph 162(7)(a) is the greater of $100 and $25 multiplied by the number of days which the failure continues. However, a distinction can be made with respect to the application of the penalties provided by subsection 162(5) and subparagraph 162(7)(a).
The importance of the information that is missing from a prescribed form will determine whether the penalty in subsection 162(5) or paragraph 162(7)(a) is applicable. Subsection 162(5) applies in situations where the prescribed form is filed, but the form is missing information which does not affect the substance of the form. However, in situations where the prescribed form is filed within the required deadline, but the form is substantially incomplete, the applicable penalty would be provided by paragraph 162(7)(a) if a valid return is not received by the filing deadline. More specifically, paragraph 162(7)(a) is applicable in situations where the prescribed form is missing information or documentation to the extent that the form is considered to be invalid. Where a prescribed form received by CRA is considered invalid, it follows that it has not been filed as and when required by the Act.
In that regard, section 32 of the Interpretation Act provides guidance as to the determination of when a prescribed form is considered to be invalid. Section 32 states that where a form is prescribed, deviations from that form, not affecting the substance or calculated to mislead, do not invalidate the form. The Court has taken a similar view in Bullard Estate v. the Queen 2004 TCC 249. In that case it was stated that where a taxpayer has only provided limited information in a form, the form is considered to be invalid. The court also stated the view that section 32 of the Interpretation Act is meant to ensure that a prescribed form will be valid in situations where the missing information or documentation relates to form only. Therefore, in situations where all or some of the necessary and substantive elements on a prescribed form are missing, or incorrectly stated by a taxpayer, the form will be considered invalid. However, it is a question of fact as to what elements of information required on a prescribed form would be considered to be substantive elements such that the form is substantially incomplete without those elements.
Consequently, the penalty provided under paragraph 162(7)(a) for the failure to file an information return as and when required by the Act would be applicable to the substantially incomplete foreign reporting forms, without regard to whether the form was received prior to the required filing due date. However, in situations where the missing information or documentation does not affect the substance of the prescribed form and, therefore, does not invalidate the form, the applicable penalty would be provided by subsection 162(5) for the failure to provide information.
In your inquiry you have also raised a concern with respect to the communication of the applicable penalties for incomplete foreign reporting forms. To address this concern we suggest that the relevant forms, guides and Canada Revenue Agency web pages be revised to emphasise the requirement to provide all of the required information on the prescribed form by the deadline, or the form may not be considered a valid form. In addition, any revisions should emphasise the fact that penalties will also be applied where the prescribed form is incomplete or the required documents are not provided with the form.
We trust these comments will be of assistance.
Yours truly,
Terry Young, CPA, CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
