2015-0590681I7 Application of paragraph 162(10.1)(e) penalty

Principal Issues: How should the total amount subject to penalty be calculated?

Position: It should be the greatest of the total cost amounts of all specified foreign properties per period.

Reasons: Wording of s. 162(10.1)(e)

Author: Agarwal, Lata

                                                          July 16, 2015

      Stephanie Henderson                 HEADQUARTERS
      Manager                                      Income Tax Rulings Directorate
      Offshore Compliance Section        
      Offshore Compliance Division     Lata Agarwal, CPA, CMA, MBA
      Compliance Programs Branch         

                                                           2015-059068

      Calculation of paragraph 162(10.1)(e) penalty

We are writing in response to your email of June 4, 2015, and our phone conversation on June 23, 2015 (Henderson/Talbot/Young), in which you requested our assistance in interpreting the penalty provisions under paragraph 162(10.1)(e) of the Income Tax Act (the “Act”). In particular, you would like us to confirm whether the computation of the paragraph 162(10.1)(e) penalty should be based on: 

Option 1: the highest of all amounts each of which is the total costs of all specified foreign property at a certain date (e.g., month end); or

Option 2: the total of the highest of the costs of each specified foreign property during the year.

You have also informed us that in the past, you have utilized Option 1.

Our comments

Subsection 162(10) imposes a penalty on a person or partnership who is required to file an information return under section 233.3 for a taxation year or a fiscal period and, knowingly or under circumstances amounting to gross negligence, fails to file that return as and when required. Subsection 162(10.1) imposes an additional penalty on the person or partnership if the return is more than 24 months late.

The amount of the additional penalty is equal to A – B, where, under paragraph 162(10.1)(e), element A is:

“…5% of the greatest of all amounts each of which is the total of the cost amounts to the person or partnership at any time in the year or period of a specified foreign property (as defined by subsection 233.3(1)) of the person or partnership..” [Emphasis added]

In our opinion, pursuant to the wording in paragraph 162(10.1)(e), element A would be equal to 5% of the highest of all amounts each of which is the total of the cost amounts of all specified foreign property of a person or partnership at any particular time in the year, e.g., at the month ends. In other words, we agree with Option 1 where the computation of paragraph 162(10.1)(e) penalty is based on the highest of the total costs of all specified foreign property during the year, rather than on the total of the highest cost of each specified foreign property during the year.

In our view, this interpretation is consistent with the definition of “reporting entity” in subsection 233.3(1), which requires a comparison of the total of the cost amounts of all specified foreign property during the year with the $100,000 threshold, rather than the costs of the individual properties at different points in time. Similarly, in our opinion, the collective reference in paragraph 162(10.1)(e) to the cost amounts of “a specified foreign property” means the cost amounts of the various properties that fall under the definition, “specified foreign property”.

We trust that these comments will be of assistance. If you would like to discuss the matter further, please do not hesitate to contact us.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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