Tax Tip[] Penalties

Foreign Bank Account Reports – Make Sure to File Them

A United States person is required to file FinCEN Form 114, “Report of Foreign Bank and Financial Accounts”(“FBAR”),  whenever that person has

  • A financial interest in a foreign financial account; or
  • Signing authority over a foreign financial account; or
  • Any authority over a foreign financial account

and the aggregate value of all accounts (not each account separately) exceeds US $10,000 at any time in year.   Reportable accounts would include, among others, corporate accounts where the taxpayer is a signing officer (even if not a shareholder) and trustee accounts.

The FBAR is not an income tax form. As such no guidance is found under the Internal Revenue Code nor its accompanying Regulations (which is one of the reasons the IRS brought out Form 8938, “Statement of Specified Foreign Financial Assets”).

Instead, the requirement to file an FBAR is created under of the U.S. Bank Secrecy Act of 1970.  The legislation was brought in to combat money laundering but its use has expanded over the years.

There have been a number of developments that taxpayers should be aware:

  • For 2016 and subsequent years, the due date has been changed from June 30th to April 15th, to coincide with the Federal income tax filing due date.
  • A maximum six-month extension of the filing deadline is now available. For the 2016 filings, FinCEN will grant filers, failing to meet the annual due date of April 15th an automatic extension to October 15th each year.  No specific request for the extension are required (that is nothing has to be filed).
  • Under the U.S. Foreign Account Tax Compliance Act (“FATCA”) and the Canadian Intergovernmental Agreement (“IGA”), Canadian financial institutions have been sharing (via the CRA) information on their U.S. customers with the U.S. Internal Revenue Service (“IRS”).

Recently, the U.S. Justice Department sued a U.S. citizen / Canadian resident the equivalent of Cdn $1.1 million for failing to file his FBAR form.

The penalties for not timely filing an FBAR can be prohibitive.  The penalty for a willful violation is the greater of (i) US $124,588 (inflation adjusted)  or (ii) 50 percent of the balance of the account at the time of the violation.  These penalties are imposed on each account and for each year that the FBAR was not filed.  In addition, criminal penalties can be imposed and could include a fine up to US $250,000 or 5 years in jail or both.

While the filing of the FBAR can feel intrusive and one can object, in principle, to it, the penalties don’t justify the risk.  With the IRS now getting financial information from Canadian financial institutions, they are better positioned to catch delinquent filers.  Given that the IRS has had various amnesty programs, going back to 2009, the may not feel inclined to waive any penalties.

As such, make sure you timely file a properly completed FBAR.


The above  information is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of section 10.37(a)(2) of U.S. Treasury Department Circular 230. The contents of this document are intended for general information purposes only.

Penalty and Refund Changes

“Refunds could be unexpectedly withheld.”

The CRA recently sent out a press release highlighting some changes that were mentioned in the recent Budget. They are effective April 1, 2007.

  1. Failure to File Penalty

If a GST/HST return is filed late, there will be a 1% penalty for the unpaid amounts plus 0.25% of the overdue amount for each month that the return is late to a maximum of 12 months.

  1. Refund Hold

Where a taxpayer is expecting a refund from a GST/HST return, the refund will only be sent to the taxpayer if they have filed all their returns for all business accounts.  That is, if there are income returns or other returns outstanding, the refund will not be sent until all tax returns have been filed.

  1. Offset of Refunds

If a refund is expected for a GST/HST return and there are amounts owing under the Income Tax Act or other Tax Acts, the refund or rebate will automatically offset the other amounts.  Therefore, a taxpayer will no longer receive a refund of GST/HST if there are amounts owing for income taxes.

Clients should be made aware of these changes. Otherwise, refunds could be unexpectedly withheld or applied to outstanding balances until tax returns are filed.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

163(2) Gross Negligence Penalty

“Can an accountant’s gross negligence transfer to the client?.”

In the Finley case (1997 TCC 615), the taxpayer decided to incorporate his video business using the rollover provisions of section 85. The transfer of goodwill resulted in capital gains. The taxpayer failed to report the capital gains resulting on the transfer of goodwill in his personal income tax return. The Canada Revenue Agency (“CRA”) assessed the gross negligence penalty for the omission of the capital gain on the taxpayer’s return and for failing to provide an explanation for this omission.

The taxpayer had been in business since 1983 and had a grade 13 education. He always had an accountant or a friend prepare the accounting records of the business, as well as the taxfilings. For the year in question, the taxpayer relied on the expertise of the accountant, signed the return without review, and filed it with the CRA.

The taxpayer had discussed the tax implications of incorporating his business using section 85 of the Act with his lawyer and accountant. It was his understanding that incorporating his business using the provisions of section 85 would not generate any tax.On the advice of his lawyer, the taxpayer incorporated his business. All the required filings associated with the incorporation of the business (i.e., Form T2057), the corporate income tax return and the taxpayer’s personal tax return were filed on time.

The CRA’s position was that the taxpayer was advised of the requirements under the Act with respect to the incorporation of his business and he failed to ensure the accuracy of his returns. Had he reviewed the returns, he would have known that the capital gain was missing.

The Tax Court ruled that:

  1. The taxpayer had no knowledge that the capital gains were omitted from his return, as he believed no tax was generated from incorporation of his business;
  2. The error committed by the accountant amounted to gross negligence as theaccountant had knowledge of taxpayer’s business affairs and was party to the transaction; and
  3. The actions of the accountant are attributable to the taxpayer, and the taxpayer was subject to the gross negligent penalty.

The Federal Court of Appeal ruled in favour of the taxpayer and said that the Tax Court judge erred in the findings that the actions of the accountant were attributable to the taxpayer. The Federal Court found that the taxpayer had no knowledge of the errors committed by the accountant and that the gross negligence of the accountant was not attributable to the taxpayer. Accordingly, the Federal Court set aside the decision made by the Tax Court.

This case rightfully determined that a taxpayer cannot be responsible for the errors committed by the accountant, especially where the taxpayer had no knowledge of that error.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

163(2) Ignorance Could Have Been Bliss

“If you receive tax advice and disregard it, you are far more exposed for penalties.”

The recent Coady case (2006TCC 153) related to the sale of land, and whether the gain on sale was a capital gain or was income for tax purposes. We shall not focus here on that aspect, but rather on the penalties for gross negligence, which were assessed on the taxpayer, under subsection 163(2) of the Income Tax Act.

The taxpayer was a well-educated man who was vice- principal of a high school and executive director of a golf association in Prince Edward Island. He even “did the books” for both.

When the taxpayer sold the property, he realized that there were significant tax issues and consulted an accountant. The accountant explained the income tax considerations to determine if the land sale was on account of income or capital. The accountant also explained the GST implications. The accountant gave no final opinion, but stated that he would be happy to discuss the subject further with Mr. Coady. Although the land was owned solely by the taxpayer, the entire gain was reported on his wife’s tax return, since he believed that his wife had a capital loss carryforward that she could use to offset part of the gain.

The fact that the taxpayer consulted a professional accountant, knowing that there weresignificant tax issues, was considered by the CRA in assessing penalties. The Court’s view was that the taxpayer consulted an accountant, took advice, and then “cherry-picked” which advice to use and which to disregard. Including the capital gain on his wife’s tax return, when there was no legal or other reason to do so, was, in the Court’s opinion, evidence that the taxpayer acted in total disregard of the law.

A lesson here is that, if you receive professional tax advice and disregard it, you may beexposed to penalties. Another lesson is obvious — you must report all gains on your tax return, and cannot have them reported instead on your spouse’s return, unless the gain was actually hers.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Fairness & Late Filing Penalties

“Late-filing penalties were referred back to CRA because all taxes were paid.”

In the recent case of Bremer (2006 FC 91), Mr. Bremer had filed his tax return five months after the due date, which was April 30, 2003. He actually filed his tax return on October 14, 2003. Mr. Bremer believed that there was no tax payable at the due date. However, he discovered that he owed some tax and paid the balance due in May 2003. The CRA assessed the tax owing and a late-filing penalty of 5%, plus 1% for each month up to the date of filing (October 14, 2003).

Mr. Bremer requested that the fairness provisions be applied to remove the 1% monthly late-filing penalty and to adjust the interest, since he had paid the tax in May 2003, but the charges were upheld by the CRA, in part because Mr. Bremer had a history of late filing his tax returns. The CRA followed the appropriate provisions of the Income Tax Act.

The Federal Court made a judicial review of the CRA’s refusal to reduce the charges and determined that, from May 2003 onwards, the taxpayer owed no tax or penalties as he had paid the amount due. Accordingly, when the taxpayer field his return, the only amount outstanding was the 1% monthly penalty applied for each month late filing. The Court determined that the CRA had made a reviewable error, and referred the matter back to the CRA to re-determine the appropriate penalties and interest to be applied.

This is an interesting case, as the CRA properly applied the provisions of the Income Tax Act. The Court, however, felt that it was unfair for a taxpayer to have to pay a late-filing penalty when all the tax due had been paid.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

The Price of Not Reporting Stock Options

“A taxpayer is required to include the proper amount in income even if no slip has been issued..”

A recent tax court case is a warning to taxpayers who assume that, if their employer does not issue a slip, the related income need not be reported. Forty-six Pfizer Canada employees exercised stock options from 1993 to 1997. Twenty-three of them did not report the benefits related to the exercise of their stock options in their tax returns. The stock options that were exercised were options to acquire shares of Pfizer U.S.A., not Pfizer Canada. For reasons of confidentiality, U.S.-based employees of Pfizer dealt with the stock options. However, Canadian-based employees processed the T4 (employment income) slips. Consequently, no T4 slips were issued in respect of the stock option benefits even though they were taxable in Canada.

The CRA discovered that the 23 individuals did not report their stock option benefits when their employer, Pfizer Canada, was audited.

The CRA attempted to open the individuals’ statute-barred years, pursuant to subsection 152(4) of the Income Tax Act, and also applied gross negligence penalties under subsection 163(2).

The taxpayers argued that because no stock option benefit was included on the T4, they believed that they did not have to include any amounts in income. They also claimed that section 7, which deals with stock option benefits, was a complicated provision and it would be unfair to penalize them for gross negligence because they did not understand the technicalities of that section. The taxpayers also argued that they did not intentionally omit the unreported income.

Unfortunately, the Court was provided with written evidence that all of the employees were told to consult a tax advisor to determine the implications of the stock option exercise and sale. The Court was not impressed with the other arguments and allowed the CRA to open the statute-barred years and to apply penalties under subsection 163(2).

The lesson to be learned is that each taxpayer is responsible for correctly reporting his/her income. Relying on the employer corporation to calculate their income does not absolve an individual from reporting income correctly. Moreover, taxpayers at a certain level of sophistication are expected to consult tax professionals. Not doing so can result in the application of penalties, as was the case here.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.