27 June 2019 Internal T.I. 2019-0791541I7 - Interaction of 162(5) and (7)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether penalties under subsections 162(5) and (7) can both apply to a late-filed Form T1135 that is missing information that is not substantial to the form.

Position: Yes, but depending on the circumstances, assessing both may not be appropriate.

Reasons: The late-filing of an information return is a separate failure from failing to provide information on an information return.

								June 27, 2019

Workload Development Division				HEADQUARTERS
High Net Worth Compliance Directorate		Income Tax Rulings
International Large Business and			  Directorate
Investigations Branch					Julia Clarkson
(613) 670-9089
Attention: Jyoti Lal
								2019-079154

Interaction between subsections 162(5) and (7)

We are writing in reply to your request on January 8, 2019, for our comments on whether penalties can be applied under both subsections 162(5) and (7) of the Income Tax Act (the “Act”) in respect of the same information return. Specifically, the question was raised with respect to a Form T1135 information return that was filed late and was missing required information. The missing information did not affect the substance of the form. We apologize for the delay in responding.

In your request you referred to internal interpretation (E2012-0458401I7) as it discussed the application of subsections 162(5) and (7) to a Form T1135 that was missing information that affected the substance of the form. However, you noted that Form T1135 has changed since that document was prepared.

Our comments

Filing requirements

A reporting entity for a taxation year must file Form T1135, Foreign Income Verification Statement, within the prescribed time period pursuant to subsection 233.3(3) of the Act. The determination to file is made each taxation year. (footnote 1)

Penalties where filing requirements not met

Failure to “provide any information required on a prescribed form,” such as a Form T1135, is subject to a penalty of $100 under subsection 162(5) of the Act. Paragraph 162(5)(a) of the Act will allow an exception to the penalty if the missing information is in respect of another person or partnership and a reasonable effort was made to obtain that information. If this omission of information is made knowingly, or under circumstances that amount to gross negligence, then a penalty can be applied under subsection 163(2.4) of the Act.

Failure to file an information return, such as a Form T1135, “as and when required” by the Act or the Income Tax Regulations (footnote 2) (the “Regulations”), or to “comply with a duty or obligation imposed” by the Act or the Regulations (footnote 3), can be subject to a penalty under subsection 162(7) of the Act. A subsection 162(7) penalty is the greater of “$100 and the product obtained when $25 is multiplied by the number of days, not exceeding 100, during which the failure continues.” However, this penalty does not apply where another provision of the Act “(other than subsection (10), (10.1) or 163(2.22)) sets out a penalty for the failure.” If a person fails to file an information return knowingly or under circumstances that amount to gross negligence, then additional penalties can be assessed under subsection 162(10) and possibly subsection 162(10.1) of the Act, depending on how long the failure continues.

Interaction of penalties under the Act

When an information return is filed by its due date but is missing information that is not substantial, subsection 162(7) of the Act cannot apply since subsection 162(5) “sets out” a penalty for the failure to provide information.

However, an information return that is missing substantial information will be considered invalid and, therefore, will not be considered to have been filed. (footnote 4) In such a case, a penalty may be applied under paragraph 162(7)(a) (footnote 5) for a failure to file the information return by its due date and subsection 162(5) would not apply. If an invalid information return resulted from circumstances amounting to gross negligence, then penalties under subsection 162(10) and paragraph 162(10.1)(e) could also be applied depending on how long a correct and complete information return remained outstanding.

To illustrate how the two penalties interact, consider a taxpayer that late-filed a Form T1135 that was missing insubstantial information about a particular specified foreign property. As we stated above, a penalty under subsection 162(7) cannot apply if another provision of the Act (other than subsection (10), (10.1) or 163(2.22)) sets out a penalty for the failure. Therefore, in order for the Minister to be able to assess penalties under both subsections 162(5) and (7), late-filing an incomplete information return must be considered two failures, not one.

In our view, this would constitute two failures: the return was not filed on time and the return was missing information. This would permit (but not require) the Minister to assess a penalty for each of the failures.

To test the reasonableness of our conclusion, we considered what the overall penalty would be if this example were considered to be one failure or two. If the example is considered to be one failure, the taxpayer would only be liable to a maximum penalty of $100 under subsection 162(5) for failing to provide information. In comparison, a taxpayer that late-filed a complete Form T1135 would be liable to the higher maximum penalty of $2,500 under subsection 162(7) for failing to file a return by its due date. In our view, such an approach would “discourage taxpayers from being diligent and taking reasonable care in the preparation of their returns.” (footnote 6)

On the other hand, if the example is considered two separate failures, the taxpayer would be liable to a subsection 162(7) penalty for late-filing the return and a subsection 162(5) penalty for failing to provide required information on the return when it was filed. In our view, this is reasonable, as the penalties would address different failures.

Conclusion

In our view, where a taxpayer late-files a Form T1135 and the return is missing some required information the Minister may technically assess penalties under both subsection 162(7) (for late-filing the return) and subsection 162(5) (for not providing all the required information on the return that was filed).

We note that the courts have stated that penalty provisions, such as subsections 162(5), 162(7) and 233.3(3), are intended “to motivate taxpayers who own foreign property whose cost amount exceeds $100,000 to report their foreign-source income.” (footnote 7) However, the courts have also shown a dislike for disproportionate penalties on more than one occasion. (footnote 8) Therefore, we suggest that care be taken to ensure that assessing penalties under subsections 162(5) and (7) is both appropriate based on the relevant facts of a situation and equitable to the tax community as a whole.

We trust that these comments will be of assistance.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See 2012-0444711C6 and section 233.3 of the Act.

2 Paragraph 162(7)(a) of the Act.

3 Paragraph 162(7)(b) of the Act.

4 Section 32 of the Interpretation Act states that “where a form is prescribed, deviations from that form, not affecting the substance or calculated to mislead, do not invalidate the form used.” Therefore deviations that do affect the substance do invalidate the form. See also internal interpretation 2012-0458401I7.

5 See the CRA’s documents 2012-0458401I7 and 2006-0185642C6.

6 See paragraph 44 of the decision for Estate of Stanley Vine v The Queen (2014 TCC 64).

7 See paragraph 8 of Fiset v The Queen (2017 TCC 63) and paragraph 15 of Leclerc v The Queen (2010 TCC 99).

8 See Takenaka v AGC (2018 FC 347), Suissa et al v AGC (2013 FC 897), Lipson et al v The Queen (2012 TCC 20), and Home Depot of Canada Inc. v The Queen (2009 TCC 281), for example.