CRA T1135 Penalties: Missed Foreign Property Reporting and How to Fix It

If you are a Canadian resident with more than $100,000 in specified foreign property and you have not been filing the T1135 Foreign Income Verification Statement, you owe a penalty for every year you missed. The penalty starts at $25 per day up to $2,500 per year under section 162(7), and the CRA can add a gross negligence penalty of up to $12,000 per year on top of that under section 162(10). The penalties apply even if you reported all the income from those accounts on your return and owe zero additional tax. This is an information return penalty, not a tax-owing penalty. For cross-border filers with US brokerage and bank accounts, the T1135 is one of the most commonly missed forms, and the penalty exposure accumulates quickly across multiple years.

What are the T1135 penalties?

The basic penalty under section 162(7) is $25 per day for each day the form is late, up to a maximum of 100 days ($2,500) per year. If you missed five years, the basic penalty alone is up to $12,500.

The gross negligence penalty under section 162(10) adds the greater of $24,000 or 5% of the cost amount of the property that should have been reported. This penalty applies when the failure to file was “knowingly or under circumstances amounting to gross negligence.” In practice, the CRA assesses the gross negligence penalty when the taxpayer had clear knowledge of the obligation and chose not to file, or when the amounts are large and the non-filing was obvious.

Beyond the direct penalties, a missed T1135 has a structural consequence: it extends the CRA’s reassessment window. Under section 152(4)(b.2), if a taxpayer fails to file a T1135 for a year, the CRA can reassess the return for that year at any time, with no limitation period. The normal three-year reassessment window does not protect you if the T1135 was missed. This means the CRA can go back and reassess your 2016 return in 2027 if you did not file the T1135 for 2016, even though the normal window closed years ago.

How does the CRA find out I did not file?

Three primary channels:

Automatic exchange of information. Under Article XXVII of the Canada-US tax treaty and the Common Reporting Standard (CRS), the CRA receives account information from foreign financial institutions. If you have a US brokerage account at Schwab, Fidelity, or Vanguard, the IRS receives FATCA reporting from that institution and shares it with the CRA under the treaty. The CRA’s matching algorithms compare the information received against T1135 filings. If the information says you hold $300,000 in US accounts but no T1135 is on file, the CRA flags the return.

T1135 data matching with income reporting. Even within Canada, the CRA cross-references T1135 filings against the income reported on the return. If you file a T1135 reporting $500,000 in US property but only report $4,000 in foreign investment income, the CRA may question whether all the income was reported. Conversely, if you report significant foreign investment income on the return but no T1135 is on file, the CRA infers the T1135 is missing.

Audit and review triggers. A CRA audit or review of other items may uncover foreign property that should have been reported on a T1135. If the CRA audits your rental income and discovers you own a US rental property, the auditor will check whether the T1135 was filed.

For cross-border filers, the FATCA/CRS channel is the most common. The data exchange is automatic and comprehensive. It is not a question of whether the CRA will find out, but when.

Should I file late or use the VDP?

Two paths exist for coming into compliance, and they are meaningfully different.

Path 1: File late with a taxpayer relief request. You file the missing T1135 forms and simultaneously submit a taxpayer relief request asking the CRA to waive the penalties. The relief request is under section 220(3.1), which gives the CRA discretion to cancel or waive penalties in appropriate circumstances. The CRA considers factors like whether the delay was caused by extraordinary circumstances, whether you exercised reasonable care, whether the income was reported on the return, and how quickly you corrected the situation once you became aware.

This path works best when: you missed one or two years, the income from the foreign property was fully reported on the return (so there is no additional tax owing), and you became aware of the T1135 obligation recently (new accountant flagged it, you read about it, etc.). The taxpayer relief request is not guaranteed, but the CRA routinely grants it for first-time filers who had the income reported and acted promptly.

Path 2: CRA Voluntary Disclosures Program (VDP). The VDP is a more formal program designed for taxpayers who want to correct years of non-compliance. Under the October 2025 rules, a valid VDP application must be voluntary (the CRA has not contacted you about the issue), complete (all years and all issues disclosed), and include payment of estimated taxes owing. In exchange, the CRA may provide penalty relief (partial or full depending on whether your application qualifies for Track 1 or Track 2) and may waive gross negligence penalties and possible criminal prosecution.

This path works best when: you missed three or more years, there is unreported income (not just the missing form), the amounts are significant, or you want the certainty that a formal program provides. The VDP application is more work (it requires a pre-disclosure letter, then a full disclosure), but it provides stronger protection against penalties and prosecution than an informal late filing.

The dividing line: If the only issue is the missing T1135 and the income was reported on all returns, the late-filing-plus-relief path is usually sufficient. If the T1135 was missing because the income was also not reported (or not reported correctly), the VDP is the safer route because it covers both the information return penalties and the tax owing.

For cross-border filers coordinating with IRS disclosure, the timing between the CRA VDP and the IRS streamlined procedures matters. File the CRA VDP first, then the IRS streamlined, or simultaneously. Do not file the IRS streamlined first and then the CRA VDP, because the IRS disclosure may trigger CRA awareness through information exchange, which could disqualify the VDP application (it must be voluntary).

What about the US side?

Cross-border filers with US accounts have parallel reporting obligations on both sides. If you missed the T1135 in Canada, check whether you also missed the FBAR and Form 8938 in the US (or vice versa). The US penalties for missing the FBAR can be far more severe (up to $16,987 per account per year for non-willful violations after Bittner v. United States, or up to $159,855 per violation for willful violations).

The coordination question is whether to disclose in both countries simultaneously. The IRS streamlined procedures and the CRA VDP are independent programs, but information exchange between the two agencies means that disclosing to one agency may eventually reach the other. The safest approach is to address both sides at the same time, ideally with a practitioner who understands both programs. See the CRA VDP and IRS streamlined coordination guide for sequencing and timing.

If you are a US citizen or green card holder living in Canada, you may also need to consider whether the US streamlined domestic offshore procedures (SDOP) or the streamlined foreign offshore procedures (SFOP) apply. The SFOP is available to taxpayers who meet the non-residency requirement (no US abode and at least 330 days outside the US in one of the three most recent tax years), which most Canadian residents will meet. The SDOP imposes a 5% miscellaneous offshore penalty on the highest aggregate balance of the undisclosed accounts.

Can I get the penalties waived after they are assessed?

Yes. If the CRA has already assessed T1135 penalties, you can request relief through section 220(3.1). The CRA considers the same factors as a prospective relief request: was there reasonable cause, were there circumstances beyond your control, did you act as soon as you became aware, was the income reported.

If the CRA denies the relief request, you can apply to the Federal Court for judicial review of the denial. The Federal Court reviews whether the CRA exercised its discretion reasonably, not whether the court would have made the same decision. The bar for overturning a denied relief request is high, but not impossible, particularly if the CRA failed to consider relevant factors.

You can also file a notice of objection against the penalty assessment itself (challenging the penalty on legal grounds, such as arguing the gross negligence standard was not met). This is different from the relief request (which accepts the penalty was properly assessed but asks the CRA to exercise discretion to waive it).

What if the CRA is already asking questions?

If the CRA has sent you a letter asking about the T1135, the VDP is no longer available for that issue (the VDP requires the disclosure to be voluntary, meaning the CRA has not yet contacted you about the specific matter). You can still file the late forms and request relief, but the VDP’s enhanced protections (including protection from prosecution) are off the table.

If the CRA has initiated an audit that includes the T1135 issue, cooperate fully. Provide the missing forms, explain the circumstances, and make the case for relief in the audit context. The auditor has some discretion on whether to recommend gross negligence penalties, and a cooperative taxpayer with a credible explanation (reliance on a professional who did not mention the T1135, genuine unawareness of the obligation) is less likely to face the harsher penalties.

What should I do next?

Count how many years you missed the T1135. Check whether the foreign income was reported on all those returns. If the income was reported and you missed one or two years, file the late forms with a taxpayer relief request. If you missed three or more years, or if the income was not fully reported, apply to the CRA VDP. If the CRA has already contacted you, file the late forms immediately and request relief in the response. In all cases, check whether you also have US-side reporting gaps (FBAR, Form 8938) and address both countries simultaneously.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.