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tax matters

I think that common sense is in short supply today. No one is immune. We can all be accused at certain times of not following it.

It wasn't long ago that I was making my way to visit a friend at his cottage when I entered the address into my GPS to guide me there. After what was a very long trip I found myself in what seemed like the middle of a forest, the likes of which I had never seen. My son in the backseat was a little concerned, so I told him not to worry about it and just pretend he was Grizzly Adams on the search for some new species of animal. Common sense should have dictated that I turn around when I hit the dirt trail off the main road. But alas, common sense was nowhere to be found.

I think it's even harder to find common sense administered by the tax authorities. A recent Tax Court of Canada decision was a breath of fresh air, however, and it's good news for taxpayers. Let me explain.

The facts

In the case Bruce Douglas v. The Queen (2012 TCC 73), Mr. Douglas was subject to a penalty of $2,500 for failing to file a particular form on time. It was Form T1135, which requires anyone owning foreign property with a cost of at least $100,000 to report on the form this ownership and any income from the property.

Now, Mr. Douglas prepared his own tax return for 2008, as he does every year. The filing deadline for his tax return was June 15, 2009, but he didn't file the tax return until March, 2010. There was no problem with this since Mr. Douglas didn't owe any tax for 2008. He had reported $28,636 of professional revenues, but net professional income of just $865 that year. With no tax owing, Mr. Douglas wasn't going to be penalized for filing his tax return late.

Since the filing deadline for Form T1135 is the same as the deadline for the tax return, Mr. Douglas didn't think twice about sending in Form T1135 late with his tax return in March, 2010. That is, Mr. Douglas readily admitted to filing his T1135 form late, but didn't expect this to be a problem since he wasn't going to be penalized for filing his tax return late. The Canada Revenue Agency (CRA) levied a late-filing penalty of $2,500 with respect to Form T1135.

The decision

It's not often that we can point to a judgment that, in the face of tax laws that are worded very strictly, adheres to common sense rather than a strict reading of the law. Subsection 162(7) of our tax law is strict in the levying of a penalty for filing Form T1135 late, and there's no real opportunity for a "due diligence defence" when you've been careful in your tax filings. In this case, however, Justice Judith Woods of the Tax Court of Canada – previously an experienced tax practitioner in her own right – sided with the taxpayer in a common-sense judgment.

Justice Woods said, "The problem that I have with the application of the penalty in this case is that Mr. Douglas took reasonable actions to comply with his income tax obligations. In particular, it was reasonable for Mr. Douglas to conclude that the income tax return could be filed late because there was no tax payable for the year. It was also reasonable for Mr. Douglas to include the T1135 with the income tax return. Mr. Douglas simply followed the instructions on the form which state: Complete and file this statement with your tax return."

Technically speaking, CRA was correct in levying the penalty. If Mr. Douglas had sought professional tax advice he would have known that the form was due earlier. Justice Woods commented, however, that "it is not reasonable to expect Mr. Douglas to have sought professional tax advice concerning the T1135 given that his income was low."

Justice Woods did go on to say that a judge-made due-diligence defence should be applied sparingly. But it's a clear principle from this case (and the case Home Depot of Canada Inc. v. The Queen, 2009) that even strict penalties should not be applied if a taxpayer has taken all reasonable measures to comply with the legislation.

What does all of this mean for you? If you've been assessed penalties by CRA and you believe that you've taken all reasonable steps to make sure you've complied with the tax law, there may be relief in store.

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