Even participation in the Voluntary Disclosure Program failed to save a married couple who owned rental real estate in the U.S. from avoid penalties the Canada Revenue Agency (CRA) has imposed for missing deadlines related to T1135 forms.
Specifically, the Tax Court of Canada (TCC) upheld the penalties despite no taxes being owed and evidence that the couple were preoccupied with family troubles. Their accountant was also chastised.
In holding for the CRA, it became apparent that a long history of failing to file on time, shifting stories and inconsistent statements by the couple’s accountant helped the TCC conclude that the taxpayers failed to show reasonable diligence in meeting their tax-filing requirements.
The appellant taxpayers were both real estate agents and investors who owned vacation-style rental properties in the Outer Banks, N.C. and Mount Tremblant, Que. They also owned a real estate brokerage.
The husband and wife were each assessed penalties of $2,500 for each year that they failed to file information form T1135, Foreign Income Verification Statement, relating to the U.S. property from 2007 to 2012 (the penalties for 2007 were subsequently dropped as statute-barred.) The foreign property generated hundreds of thousands of dollars in income but also ran a net loss, and no tax was payable on that income. The couple complied with U.S. Internal Revenue Service requirements throughout the period.
The issue on the appeal was whether the taxpayers were diligent in their compliance efforts and acted reasonably, despite the failure to file.
It did not appear to help the appellants that they had made use of the Voluntary Disclosure Program for two separate periods: from 1996 to 2006 and from 2007 to 2012 — the latter being the years in dispute in the case before the TCC.
As a result of the first disclosure, $85,000 in taxes were found to be payable. Penalties were waived and T1135 filings were made for some of those years. The husband testified that his responsibilities to file T1135 forms were explained to him at that time.
Indeed, it appeared that the husband had a long history of not filing tax returns. The decision notes that the husband failed to file prior to 1997 but that no records were available to compute losses and report them.
On the question of the husband’s record keeping and tax matters, the decision notes: “[The husband] described himself as self-taught with respect to financial and record keeping matters. He said he learned his tax as he went along but would not consider himself an expert. His wife described him as being anally retentive in these departments.”
The couple’s accountant, who was hired in 2010, apparently to help clear up the couple’s chaotic tax affairs, came in for even more censure. The decision notes that the accountant first tried to assign responsibility for the failure to file on a misunderstanding over the treatment of the property for tax purposes, and how that treatment varies between the U.S. and Canada — either income from property or income from business.
However, the couple always maintained that their confusion arose from whether or not taxes were payable. The decision notes the reason given for the inconsistency: “When asked why [the accountant] wrote it, he said it was because he knew there was not a chance in hell of getting the voluntary disclosure accepted as it was [the appellant’s] second with respect to T1135 non-compliance dealing with years shortly after their first voluntary disclosure.”
The decision further notes: “[The] credibility concerns are heightened by the fact that [the accountant] was at times evasive, would not give clear answers, and was argumentative.”
Comments of a somewhat similar nature were also noted in the decision concerning the appellant husband, with the court observing that he had a strong tendency to blame others and that he even castigated his lawyer during the hearing, who the court noted, “was doing the best he could with the case he had.”
The TCC was also unswayed by arguments that illnesses being suffered by the husband, his mother and the couple’s son were sufficient reasons to find that the non-compliance penalties should be waived. The court found that these arose after the initial period of non-compliance began and that none were outside the usual life pressures and events of Canadians of the appellants’ ages.
The court also found that the need for filing T1135 forms had been clearly explained to the husband on several occasions and that he was “too smart” not to understand points made to him by the CRA and his lawyer at various stages in the proceedings.
The TCC, in holding for the CRA, also noted that the husband had made further written submissions after the end of the hearing, which he did not copy to his lawyer.
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