From Nil Tax to a $281,000 Penalty: The T1135 Trap
Most people assume that a nil tax return means a clean file. However, a 2026 Tax Court of Canada decision shows exactly why that assumption can be costly.
In Gao v. The King (2026 TCC 16), the taxpayer reported just $503.59 in income for his 2016 tax year. As a result, his total tax payable was zero. Despite this, CRA assessed $281,873 in penalties. The reason had nothing to do with unpaid income tax. It came down to a single form: the T1135.
What Is Form T1135?
Form T1135 is the Foreign Income Verification Statement. In short, it is the CRA’s tool for tracking offshore assets held by Canadian residents.
Under subsection 233.3(1) of the Income Tax Act, you must file Form T1135 if the total cost of your specified foreign property exceeds $100,000 Canadian at any time during the year. Consequently, this obligation applies regardless of whether you earned income from those assets or owe any tax.
Specified foreign property includes:
Shares of non-resident corporations
Foreign bank accounts
Foreign real estate held as an investment
Interests in foreign trusts
Certain foreign debts owed to you
Therefore, if you hold significant foreign assets, the filing requirement applies even when your taxable income is low or nil.
The Facts in Gao v. The King
For the 2016 taxation year, the taxpayer reported $503.59 in net income. At the same time, he reported approximately $5.5 million in proceeds from the sale of shares of non-resident public corporations.
CRA reviewed the file and ultimately accepted the reported adjusted cost base. As a result, no income tax was owing on the capital transactions. However, the matter shifted to a different issue entirely.
In March 2023, CRA assessed $281,873 in penalties under subsections 162(7), 162(10), and 162(10.1) of the Income Tax Act. These penalties specifically related to the failure to file Form T1135. In addition, CRA challenged the taxpayer’s “No” answer to Box 266 on his return, the question asking whether he owned specified foreign property costing more than $100,000 during the year.
The Taxpayer’s Legal Argument
The taxpayer raised an interesting statutory argument. He argued that because his income fell below the personal exemption threshold, he owed no tax. Therefore, in his view, he was “exempt from tax under Part I” of the Income Tax Act and excluded from the T1135 filing requirement.
The Court acknowledged this as a novel argument. However, it signaled the argument was unlikely to succeed. The purpose of subsection 233.3(1) is specifically to allow CRA to verify income from significant offshore holdings. Accordingly, the Court noted that CRA would be especially interested in foreign assets when a taxpayer reports little or no income.
In other words, low income increases CRA’s interest in foreign assets. It does not reduce the filing obligation.
The Misrepresentation Issue
Beyond the T1135 filing failure, CRA also argued that checking “No” to the foreign property question constituted a misrepresentation.
This matters for one important reason: the statute of limitations. Under subsection 152(4) of the Income Tax Act, CRA generally has three years to reassess a taxpayer. However, if a taxpayer makes a misrepresentation attributable to neglect, carelessness, or willful default, CRA can reassess at any time.
As a result, an incorrect “No” on Box 266 can open the file indefinitely. This is therefore a significant risk for anyone who holds foreign assets and answers that question incorrectly.
The Procedural Battle: Discovery Is Not Optional
The case also raises an important procedural lesson. The taxpayer was self-represented and living in China at the time of the appeal. He refused to attend oral discovery in Canada, citing high costs and family obligations.
Under the Tax Court of Canada Rules (General Procedure), the examining party generally has the right to choose between oral and written discovery. Moreover, the Court has discretion to set the location for persons residing outside Canada.
The judge was skeptical of the financial hardship argument. Specifically, the Court noted that a taxpayer involved in over $5 million in share proceeds should reasonably be able to travel to Canada to defend a $281,873 penalty assessment.
Importantly, the Court declined to dismiss the appeal immediately. Instead, it characterized the refusal as an honest mistake by a self-represented individual. Nevertheless, it issued a firm order:
CRA may select any Canadian city for discovery: Vancouver, Calgary, Toronto, Montreal, or Ottawa
The discovery deadline is July 31, 2026
If the taxpayer fails to attend, the appeal will be dismissed without further hearing
The taxpayer must pay costs related to the previously missed discovery on March 10, 2025
This outcome is a clear warning. Procedural non-compliance can end a tax appeal before the substantive issue is ever decided.
Key Takeaways for Taxpayers and Business Owners
Based on this case, there are three practical points worth keeping in mind.
First, low taxable income does not remove foreign reporting obligations. The T1135 threshold is based on the cost of your foreign property, not on the income you earned from it. Even if your tax bill is zero, the filing requirement still applies if your foreign holdings exceed $100,000.
Second, accuracy on your return matters beyond the tax owing. Checking “No” to the foreign property question when the answer is “Yes” can be treated as a misrepresentation. This allows CRA to reassess your file outside the normal three-year window.
Third, procedural steps in a tax appeal are mandatory. Discovery is a legal obligation. Ignoring a notice to attend or a court order can result in dismissal of your appeal, regardless of the merits of your tax position.
How Cloudiverse CPAs Can Help
At Cloudiverse CPAs in Burnaby, we work with business owners, investors, and landlords who are dealing with CRA audits, T1135 penalties, and tax objections.
If you have foreign investments, foreign bank accounts, or recently sold shares of non-resident corporations, it is worth reviewing your filing obligations before CRA raises the issue first.
Reach out to discuss your situation:
aman@cloudiverse.ca | 604-200-4027
Book a free 30-minute discovery call
Full Case: Gao v. The King
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T1135 Foreign Income Verification Statement
Disclaimer: This post is for general informational purposes only and does not constitute tax or legal advice. Please consult a qualified professional for advice specific to your situation.