Chan – Tax Court of Canada finds that there is a due diligence defence under s. 162(7) where the taxpayer reasonably believed that he was not the foreign property’s beneficial owner

The taxpayer was assessed a penalty under s. 162(7)(a) for failure to file T1135 forms regarding a bank account with the Bank of China (BofC), which he had assisted his father (Joseph) to open up in his name, as well as a gross negligence penalty under s. 162(10)(a). In finding that the taxpayer was not required to file T1135s, Russell J stated:

[A]s Joseph sourced the funding of the account at all times and he alone exercised control and usage of the account, it appears reasonably clear that he alone utilized and thus enjoyed the benefit of the account. Thus I conclude that Joseph was the beneficial owner of the account, while his son the appellant merely held legal title, as his father’s nominee.

Russell J found that the penalties should be vacated for this reason, and also because, in any event, the taxpayer “had reasonable cause to believe that his father, and not he himself, held the beneficial interest in the account assets.” Accordingly, even in the case of the lower threshold for a penalty under s. 162(7)(a), “the defence of due diligence has been established – that is, the appellant reasonably believed in a mistaken set of facts that if true would have made his act or omission to act innocent.”

Neal Armstrong. Summary of Chan v. The Queen, 2022 TCC 87 under s. 162(7), s. 233.3(1) and General Concepts - Ownership.