According to a decision of the Ontario Superior Court of Justice in Csak v. Aumon, 1990 CanLII 8070 (ON SC), at paragraph 8, a "beneficial owner is one who is the real owner of property even though it is in someone else's name. The nominal owner has legal title to the property but the real owner can require the nominal owner to convey the property to him and transfer legal title to him..."
In Chan v. The Queen 2022 TCC 87 [Chan], the primary issue was the beneficial ownership of specified foreign property (a bank account allegedly containing illegally procured funds) and the respective obligation to report it on the appellant's tax return.
Was the Canada Revenue Agency ("CRA") correct in assuming that the appellant held a beneficial interest in the specified foreign property sufficient to establish that he had to report it to CRA and was liable for related penalties? The appellant claimed that he was not the beneficial owner for the respective years and that he reasonably believed same. Furthermore, he asserted that the reassessments were statute-barred as they did not take place within the normal reassessment period. For individual taxpayers, that is three years following the original assessment. However, appellant's counsel failed to plead the statute-barred issue.
Subject to certain conditions, Canadian taxpayers must report the ownership of specified foreign property to the CRA. This is accomplished by completing and filing Form T1135, Foreign Income Verification Statement ("T1135") with a tax return each year of ownership. Many taxpayers are not aware that the form is necessary and failure to file can result in substantial penalties (under certain circumstances, this can be rectified through the voluntary disclosure program.)
The T1135 is for specified foreign property costing above $100,000. To clarify, not the fair market value of the property but the cost to the taxpayer. Filing is mandatory pursuant to subsection 233.3(3) of the Income Tax Act, RSC 1985, c 1 (5th Supp) ("ITA"). As per subsection 162(7)(a), the initial penalty is $2500 for each year the taxpayer fails to complete and file a T1135. More specifically, $25 per day to a maximum of 100 days in a taxation year.
However, if CRA assumes that the failure to file was deliberate or on account of negligence, pursuant to ITA paragraph 162(10)(a) the additional penalty is $500 per month up to 24 months for a maximum of $12,000. Once the 24 months has passed there is a penalty of 5% of the cost of the foreign property. There are further penalties specific to form omissions and failure to comply with demands to file.
Specified foreign property is defined in subsection 233.3(1) of the ITA and, for example, includes intangible and tangible foreign property but not personal-use property. The definition of personal-use property can be found in section 54 of the ITA and includes but is not limited to vacation property and artwork.
In Chan, the father and son (both with accounting backgrounds) travelled to China to open a joint bank account. The bank would not consent to a joint account, nor did they initially allow a power of attorney. Therefore, the account was opened in the son's name, the appellant, but financed by the father. A few years later the bank permitted the son's power of attorney for the benefit of his father. Interestingly, CRA claimed that the source of the account funds, approximately $2 million, stemmed from the father's illegal behavior including failure to report income for almost a decade and the preparation of false tax returns to generate refunds.
The Tax Court ultimately decided that the appellant did not have beneficial title to the account for the respective tax years but functioned as his father's nominee. The judge pointed to multiple supporting facts. For instance, the father made statements earlier in the dispute indicating he alone was the beneficial owner. He controlled the account and the appellant would conduct online transactions when asked. The father financed the account in whole, even though the funds were allegedly illegally obtained, and despite holding legal title the appellant was obligated to return the account to his father. Accordingly, for the years at issue, the father was responsible for filing the T1135 forms reporting the foreign bank account, and not the son.
The Tax Court determined that even if the appellant had held a beneficial interest, he reasonably believed the account was his father's therefore he was relieved of liability for the negligence penalties. According to the Court, at paragraph 45, "I conclude that Joseph was the beneficial owner of the account, while his son the appellant merely held legal title, as his father's nominee...".
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
This article was first published by The Lawyer's Daily on September 15, 2022.
