Newsletters: January 2015 – BGK Announcements

Date: January, 2015

SPOTLIGHT

I want to take a moment and wish everyone a very Happy New Year and all the best for a healthy and prosperous 2015. In the spotlight this month I wish to take the opportunity to share with you new additions to our team and employee success stories. — Brian Kreisman, Managing Partner

BGK is very pleased to announce the addition of Richard (Richie) Scheim, CPA, CA and Richard (Ricky) Schnurbach, CPA, CA who joined our firm as Principals effective January 5, 2015. Both Richie and Ricky have over 10 years of diversified experience in assurance, business advisory services and taxation.

Ricky and Richie
(left to right: Ricky and Richie)

Richie has been advising his entrepreneurial clients in specialized industries such as manufacturing, distribution, real estate, general contracting, bars and restaurants, and professional services. He has helped his clients secure financing for start-up businesses and has helped to ensure their continued growth and success. His tax knowledge has allowed him to effectively tailor tax strategies to the needs of his clients, and he has also recently published an article in the Montreal Gazette informing readers of the tax advantages of different ownership structures for revenue generating properties.

Ricky is specialized in assurance and corporate finance and is responsible for project management and execution of client mandates. He specializes in clients dealing with information technology, wholesale distribution and retail. Ricky is focused on being continuously involved in his clients’ initiatives to implement successful business strategies. His clients appreciate his devotion to growing and nurturing their businesses.

Both Richie and Ricky will be valuable additions to the BGK team, and they will contribute to the high level of achievement and client service that is expected at BGK.

Assis – de gauche à droite : Hugo, Vanessa, Artun. Debout – de gauche à droite : David, Marco, Brenda
(Seated – left to right: Hugo, Vanessa, Artun. Standing – left to right: David, Marco, Brenda)

It is with great pleasure to announce that Vanessa Asimacopoulos, Hugo Chalifour, David Gallucci, Brenda Hoang, Marco Ranieri and Artun Tohmanciyan have passed the UFE final examination in 2014 to be admitted as members of the Ontario and Quebec Order of Certified Professional Accountants. We congratulate them on their achievement and look forward to having them remain valued members of our team for many years to come.

BEWARE OF PENALTIES WHEN FILING FOREIGN TAX RETURNS

The article was published in, Stratège, Vol. 19, No. 4, September 2014

Martin-Karl Bourbonnais, attorney, LL.M. Fisc.
Tax advisor
Bessner Gallay Kreisman, LLP, Ottawa
mkbourbonnais@bgk.ca

For the past several years, the Canadian government has been battling the problem of tax evasion and the international transactions that facilitate it. The government’s response to this scourge has led to numerous legislative and administrative changes.

The fight against aggressive international tax evasion and tax avoidance schemes

More precisely, on May 8, 2013, the Harper government announced a $30-million investment and the creation of a specialized task force to implement the measures announced in the Government of Canada’s Economic Action Plan 2013. The first of three major measures outlined in the Plan is the launch of a new program entitled “Stop International Tax Evasion,” which, in short, will involve the Canada Revenue Agency (CRA) paying a reward (percentage of the federal taxes collected) to individuals who provide information on cases of international tax non compliance, under what is more commonly known as the “Offshore Tax Informant Program.” The second measure involves requiring financial institutions to report international electronic funds transfers of $10,000 or more to the CRA. Third, the CRA has added requirements to the Foreign Income Verification Statement (Form T1135), i.e., Canadian taxpayers with assets abroad must now provide detailed information on this form. The government also extended the CRA’s reassessment period for establishing a new contribution regarding Form T1135.

New Form T1135

Following the launch of the Economic Action Plan, on June 25, 2013, the CRA announced several changes to the filing of Form T1135 by Canadian taxpayers for 2013. The amount of information required by the CRA, which, incidentally, is difficult to obtain, came as a surprise to many tax specialists. On February 26, 2014, the CRA announced a transitional relief measure that would allow taxpayers to report the combined fair market value of their investment portfolios with a Canadian financial institution rather than reporting the details of each property. On July 8, 2014, the CRA announced new changes to Form T1135 for 2014 and subsequent tax years, aiming, among other things, to eliminate the reporting exception that excludes certain property from the detailed reporting requirement where the taxpayer has received a T3 or a T5 slip. It also introduced a new Category 7 on the form: “Property held in an account with a Canadian registered securities dealer or a Canadian trust company.” Under this category, taxpayers will have to indicate the name of the securities dealer or trust company, the highest fair market value during the year of all property held in the account, and the fair market value of property held in this account at the end of the year. The total income earned and the gain on all dispositions made during the year must also be reported. Unlike the 2013 transitional method, total amounts must be reported per country. Moreover, taxpayers can use the average exchange rate for the year to declare the highest value and the income for the year. So, unless they opt for the simplified method, taxpayers must fill out Form T1135 in full, property by property, given that the T3 or T5 slip exclusion has been eliminated. The new Category 7 does not apply to taxpayers’ accounts held with a foreign financial institution. In this case, property held in the account must be reported separately on Form T1135 (foreign currency, stocks, shares in a trust, shares in a partnership, etc.).

CRA policy when foreign returns are submitted on time but are incomplete

The changes described above confirm the new direction taken by the federal government, which is attempting to keep closer tabs on Canadian residents’ compliance with respect to their foreign tax returns. For example, the CRA’s Ottawa Technology Centre previously received a large number of incomplete foreign tax returns. When it received the return on time, the CRA did not assess the penalties applicable under section 162 of the Income Tax Act (ITA). Instead, it sent the taxpayer a letter asking him/her to submit the missing information by the stipulated deadline. If the taxpayer did not send this information, the CRA contacted him/her for a follow-up. Therefore, it came as no surprise when the CRA recently stated in an interpretation letter that this procedure is ineffective and counterproductive.

Interpretation letter 2012-0458401I7

At the same time as the CRA unveiled its new Form T1135, in February 2014, it also published interpretation letter 2012-0458401I7. Dated December 6, 2012, this letter was not published until March 26, 2014. In it, the CRA confirms that pursuant to paragraph 162(7) of the ITA, a taxpayer who does not provide all essential information (who neglects to fill out certain boxes on the form or to attach documents) will be assessed a minimum penalty of $100 and a maximum of $2,500 ($25 per day of default), even if he/she filed on time. However, the CRA states that it will assess the $100 penalty stipulated in paragraph 162(5) of the ITA for a foreign tax return that was filled out on time but was incomplete due to failure to provide non-essential information. This penalty is applicable to all incomplete forms. As such, a taxpayer who neglects to provide several items of information on the same form will be assessed the $100 penalty only once. In fact, the letter states that missing information must be viewed as a whole.

Forms covered by the interpretation letter

In addition to Form T1135, discussed above, the CRA interpretation letter covers the following forms: Information Return of Non-Arm’s Length Transactions with Non-Residents (T106), Information Return Relating To Controlled and Not-Controlled Foreign Affiliates (T1134), Information Return in Respect of Transfers or Loans to a Non-Resident Trust (T1141), and Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust (T1142).

Application of paragraphs 162(5) or 162(7) of the ITA, and concept of essential and non essential information

There is an important distinction to consider with respect to missing information. Even though paragraphs 162(5) and 162(7) of the ITA each stipulate a penalty for failure to provide information on a prescribed form, it is the importance of the missing information that determines the type of penalty assessed. For example, if the missing or incorrect information is essential to comprehension of the form, the latter will be deemed invalid and, therefore, not filed. In this case, the penalty pursuant to paragraph 162(7) of the ITA will apply. However, if the missing information does not compromise the effectiveness of the form and, therefore, does not invalidate the form, the penalty under paragraph 162(5) of the ITA will apply. However, determining which information is essential is a matter of fact. On this topic, the interpretation letter of December 6, 2012, cites the Tax Court of Canada decision Estate of Lily Bullard v. The Queen (2004 TCC 249). In summary, the Appellant miscalculated the value of the adjusted cost base (ACB) on Form T664, Election to Report a Capital Gain on Property Owned at the End of February 22, 1994, related to the sale of her principal residence. As a result, she was denied the capital gains exemption on this residence. According to the Appellant, the ACB is not a discretionary amount; therefore, it does not constitute a substantive field on the form. However, according to the Court, the ACB is clearly important information that must be provided on the form. Moreover, it is information held by the taxpayer and not the minister, so it is the taxpayer’s responsibility to ensure the correct amount appears on the form. The following is a passage from this decision, which also refers to section 32 of the Interpretation Act(IA):

“[40] Both the Appellant and Respondent referred to section 32 of theInterpretation Act and from my understanding of each of their references, they agree that this section basically states that defects in form are acceptable but defects in substance are not. They disagree however on which information in the T664 is substantive. I firmly believe that this section is meant to ensure that a form will remain valid where the deficiency relates to form only. However for the reasons given, the defects here go to the very heart of form T664 and affect it substantively. 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 and ineffective under the appropriate provision.”

Section 32 of the IA is also relevant:

Forms

32. Where a form is prescribed, deviations from that form, not affecting the substance or calculated to mislead, do not invalidate the form used.”

As such, we can conclude the following from this decision: If an amount is incorrectly stated but constitutes an essential element to the understanding of the form, the taxpayer must ensure that this amount is properly calculated in order to avoid being assessed the penalties under paragraph 162(7) of the ITA. We can also conclude that the CRA will apply the concepts set forth in section 32 of the IA.

Other penalties

Furthermore, additional penalties apply under paragraph 163(2) of the ITA when the failure to produce forms is deliberate or subsequent to circumstances equating to gross negligence. One such penalty is $500 per month for a maximum of 24 months ($12,000). Since the CRA must prove that the taxpayer is guilty of gross negligence, the penalties under paragraph 163(2) of the ITA are generally not considered in the situations described above.

Conclusion

Clearly, more than ever, taxpayers will need to be very careful when preparing their foreign income tax returns. They must make sure the information entered on the forms is accurate and that no essential information is missing (contents of the form and attached documents). Moving forward, it will be interesting to see how the CRA will implement its new policy and assess penalties based on the nature of the missing information and its categorization as essential or non-essential.

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