Should there be a judicially-created due diligence defence on the reporting of s

Posted By: Sunita D. Doobay on June 9, 2012 at 12:07:37 in All , Articles

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Since 1997 subsection 233.3(3) of the Income Tax Act(“Act”) mandates that Canadian resident taxpayers are required to file Form T1135 – Foreign Income Verification Statement – with their income tax returns where such taxpayers own specified foreign property with a cost amount of 100,000 or more.  Form T1135 is not required where the foreign property is personal property such as vacation property used by the taxpayer or personal property such as work of art, jewelry, rare books, stamps and coins. Failure to file Form T1135 will subject the taxpayer to a penalty of $25 a day up to a maximum of 100 days pursuant to subsection 162(7) of the Act.   There is no indication on the language of the statute that there is a defence of due diligence available when a taxpayer is late in filing this form.  Yet, in a recent case, Tax Court Judge Woods has clearly decided that the judiciary has the final say on the application of penalties.  The article can be found on Sunita Doobay’s blog as well.http://taxruminations.blogspot.ca/2012/06/should-there-be-judicially-created-due.html where the authors discuss their disagreement with Justice Wood’s position.

In the view of the authors, there are problems with such an interpretation, on at least four levels.  First, as a matter as interpretation of taxing statutes, it is said that the taxpayer is always free to order his or her affairs so as to avoid liability to tax.  Thus, where a taxpayer does not do so, it lies ill in the mouth of the taxpayer to cry foul after litigation has commenced.  Second, as a matter of stare decisis, the case does not address other cases that have confronted the issue.  Third, as a factual matter, it is difficult to say how due diligence can be made on the facts of the particular case, or more generally.  Fourth, there are legitimate reasons that explain why a strict interpretation – meaning that the due diligence defence is unavailable in the case of a deliberate non-filing of the form –  is preferable, from a policy perspective.

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