Background
Manjit Kaur and Mohan Singh immigrated to Canada in October 2018 and, after a brief return to India, began filing Canadian income taxes. For the 2018 and 2019 tax years, they failed to file Form T1135 (Foreign Income Verification Statement), which is required of taxpayers who hold specified foreign property with a total cost exceeding CAD $100,000. The applicants maintained they genuinely misunderstood the requirement, believing the form applied only to foreign income over $100,000, not foreign property of that value — a confusion reinforced by the form’s own title. They filed T1135 forms correctly and on time for the 2020 and 2021 tax years, and in April 2022 voluntarily disclosed the two missing earlier filings once they recognized the error.
The CRA issued Notices of Reassessment imposing a $2,500 penalty per taxpayer per late filing (totalling $5,000 each) plus arrears interest. The applicants sought relief under subsection 220(3.1) of the Income Tax Act, citing good faith, voluntary correction, minimal tax impact, and financial hardship. A First Level Reviewer granted partial relief by treating the two late filings as one and cancelling the 2018 penalty, but upheld the 2019 penalty. The Second Level Reviewer denied further relief, finding the applicants responsible for timely compliance and citing their purported history of non-compliance, failure to exercise reasonable care, and the absence of demonstrable financial hardship.
Both applicants, self-represented, brought applications for judicial review in the Federal Court (dockets T-551-25 and T-552-25), which were heard together by Justice Grant.
The Court’s Holding
Justice Grant granted the applications and remitted the matter to the CRA for redetermination. Applying the reasonableness standard of review from Canada (Minister of Citizenship and Immigration) v Vavilov, 2019 SCC 65, the Court found the Second Level Reviewer’s assessment of the applicants’ compliance history to be internally incoherent. Most critically, the Reviewer relied on the applicants’ failure to file the 2018 and 2019 T1135 forms as evidence of a poor compliance history — the very same failures for which they were seeking relief. The Court held this circular reasoning “turns the premise of a request for relief into a reason for denying it” and is inconsistent with the purpose of subsection 220(3.1), which exists to address genuine misfortunes arising from the self-assessment system.
The Court also found that the Reviewer inaccurately characterized the applicants’ overall filing record. The apparent late filings relied upon either related to a CRA technical error (for which a penalty had already been cancelled) or to a year with nil taxes owing. Moreover, the Reviewer failed to give any credit to the applicants’ prompt filing of their T1 returns immediately upon arriving in Canada in late 2018 — a positive indicator of diligence — and drew no reasonable inference from the fact that they had no T1135 obligation before becoming residents. Similarly, the Reviewer’s observation that the applicants had answered “no” to foreign income over $100,000 on their 2018–2019 returns and “yes” thereafter was entirely consistent with the very misunderstanding they had explained, and could not rationally be used against them.
The Court distinguished the respondent’s reliance on Ebadi v Canada, 2025 FC 1819, noting that case involved credibility concerns about alleged technical difficulties that were not present here. The Court also drew guidance from Tax Court jurisprudence — Moore v R, 2019 TCC 141, and Fiset v R, 2017 TCC 63 — for the proposition that the CRA’s own T1135 form title has been found ambiguous and that voluntary disclosure of inadvertent non-compliance is the kind of behaviour the relief provisions are designed to encourage, while noting the different legal standard applicable on judicial review.
Key Takeaways
- A CRA Second Level Reviewer commits a reviewable error when it uses the very non-compliance at the root of a taxpayer’s relief request as evidence of a poor compliance history — this circular reasoning is fatal to the reasonableness of the decision.
- A taxpayer’s compliance history must be assessed accurately and in full context; inaccuracies about filing records, or failure to weigh positive indicators of care (such as timely T1 filings by recent immigrants), can render a discretionary relief decision unreasonable under Vavilov.
- The misleading title “Foreign Income Verification Statement” for Form T1135 — which covers foreign property, not just income — is a recognized source of taxpayer confusion relevant to the IC07-1R1 factors, including whether a taxpayer exercised reasonable care.
- Voluntary disclosure of an inadvertent filing omission is a positive compliance factor that must be meaningfully weighed in a subsection 220(3.1) analysis.
Why It Matters
This decision reinforces that CRA discretionary relief decisions under subsection 220(3.1) of the Income Tax Act must rest on a coherent, accurate, and individualized assessment of each taxpayer’s circumstances. Reviewers cannot invoke the very error that triggered the penalty application as a strike against a taxpayer’s compliance record without engaging in impermissible circular reasoning. For practitioners advising newcomers to Canada or other taxpayers facing T1135 penalties, the decision underscores both the viability of judicial review when the CRA’s reasoning is demonstrably flawed and the relevance of voluntary disclosure and good-faith misunderstanding to the relief analysis.
More broadly, the case highlights a persistent problem with the T1135 form itself: Canadian courts — both the Tax Court and now the Federal Court — have recognized that the form’s name (“Foreign Income Verification Statement”) is misleading because it suggests an income threshold rather than a property-value threshold. Attorneys advising clients with foreign assets should counsel careful attention to the T1135 obligation and document any good-faith misunderstanding, as this may support a relief claim if penalties are assessed.