http://decision.tcc-cci.gc.ca/site/tcc-cci/decisions/en/item/64717/index.do 
Desmarais v. The Queen[1] (November 7, 2013) is a rare example of an appeal dealing with penalties for failure to file returns disclosing foreign property (in this case the shares of foreign affiliates other than controlled foreign affiliates).
[1] These are appeals, under the informal procedure, from the reassessments dated June 23, 2010, made by the Minister of National Revenue (the Minister) under the Income Tax Act, R.S.C., 1985, c. 1 (5th Supp.) as amended (the Act), in respect of the appellant’s 2003 and 2004 taxation years.
[2] In making these two reassessments, the Minister imposed a penalty of $2,500 for each of the 2003 and 2004 taxation years under subsection 162(7) of the Act for failure to file Form T1134-A within the period prescribed in subsection 233.4(4) of the Act.
[3] Form T1134-A is an annual Information Return Relating to Foreign Affiliates that are not Controlled Foreign Affiliates of the taxpayer. The obligation to file Form T1134-A is imposed by subsection 233.4(4) of the Act, which was introduced into the Act in 1997 but applicable commencing in the taxation years after 1995. This form must be filed with the Minister in respect of each foreign affiliate that, at any time in a taxation year or fiscal period, was not a controlled foreign affiliate of the taxpayer. The form must be filed by a taxpayer required to do so within 15 months after the end of the taxation year or fiscal period, as the case may be.
The property in question was shares of OREX Mines d’Or Ltée (OREX) which was originally a Liechtenstein company (continued in Canada in 2004). The appellant’s position was that he was not required to file the returns in question because the shares of OREX held by him had no value in 2003 or 2004:
[25] At the hearing, it was admitted that the appellant resided in Canada during the 2003 and 2004 taxation years and that OREX A.G. was at any time in the 2003 and 2004 taxation years a non-resident corporation that was a foreign affiliate within the meaning of subsection 95(1) of the Act, of the appellant. Consequently, the appellant was, in principle, required to file a Form T1134-A for each of the 2003 and 2004 taxation years. The deadline for filing said form was March 31, 2005, for the 2003 taxation year and March 31, 2006, for the 2004 taxation year.
[26] The appellant did not file Forms T1134-A because, according to the form’s instructions, he was not required to do so owing to the fact that OREX A.G. was a “dormant” or “inactive” foreign affiliate for the purposes of said form, that is, a corporation
a. that had gross receipts (including proceeds from the disposition of property) of less than $25,000 in the year; and
b. at no time in the year had assets with a total fair market value of more than $1,000,000.
[27] The issue, therefore, is whether the fair market value of OREX A.G.’s assets was, at any time between December 3, 2003, and February 10, 2004, more than $1,000,000.
The appellant’s position was that he had a reasonable, good faith belief that the OREX shares had no value; the respondent’s position was that he failed to exercise the appropriate due diligence in attempting to value the OREX shares:
[30] According to the appellant, the value of the OREX A.G. shares was determined at the time of AIMO’s dissolution, which occurred on June 30, 2007, well after the reporting periods for Form T1134-A for 2003 and 2004. The appellant alleged that he had acted in good faith and that there was no neglect or wilful default on his part. He took a reasoned and reasonable position during the reporting periods, even though he later admitted that the AIMO shares held by OREX were worth over $1,000,000.
[31] According to the respondent, the relief provided in Form T1134-A is only administrative relief and the appellant had the burden of ensuring that the value of the AIMO shares was less than $1,000,000. The appellant made no effort to try to determine the value of the shares and only relied on his general knowledge that the shares had no value even though he acquired them for US$200,000. He did not have the financial statements of OREX A.G. and OREX for the 2003 and 2004 taxation years prepared within the prescribed time limits. He did not have OREX A.G.’s tax returns for the 2003 and 2004 taxation years prepared and did not consult his accountant about his obligation to file Forms T1134-A. The respondent alleged that the appellant did not exercise due diligence as he could have filed Forms T1134-A in 2007 under the Voluntary Disclosures Program. For the respondent, good faith is not sufficient, and concrete action was required on the appellant’s part to determine the fair market value of the AIMO shares.
The court concluded that the appellant had made a “a thoughtful, deliberate and careful assessment of the value of OREX’s investment” and allowed his appeal:
[32] In light of the facts adduced in evidence, it appears clear to me that the appellant had in-depth knowledge of the operations of OREX A.G. and OREX, of AIMO and the private corporation Okhotsk, which was incorporated to hold mining licences for the two gold and silver mines located in Russia. He handled OREX A.G.’s continuance in Canada. He was informed of the financing transactions (share issuance and sales) performed in 2004 by Okhotsk and its shareholders. He saw AIMO’s financial statements for the year ending December 31, 2004, along with the 2003 comparative figures, which were prepared by external auditors on July 11, 2005.
[33] The appellant acquired the OREX A.G. shares under very specific circumstances. The acquisition price of the 256 OREX A.G. shares was set at US$200,000. The shares’ acquisition price was not paid at the time of acquisition but was the subject of an acknowledgement of debt in the amount of US$200,000 that would only become payable within ten days after the appellant received the funds from the proceeds of sale of AIMO’s securities held by OREX A.G. and the proceeds of sale were distributed to OREX A.G.’s shareholders, which included the appellant.
[34] The terms and conditions of the transaction described above suggest that the value of the OREX A.G. shares and its investment in AIMO was very dubious. The acquisition price of the OREX A.G. shares was payable only through the proceeds of disposition of its investment in AIMO. The shares surely had a certain value at the time of their acquisition, and it was likely that the value of the shares would increase in future years for the appellant to have seen fit to acquire them. The appellant did not assume any financial risk when he acquired the OREX A.G. shares.
[35] The transaction performed in April 2004 by which Okhotsk issued 20,592 new shares to some of its shareholders for a total consideration of US$33,420,000 enabled it to finance future transactions. AIMO was not involved in this financing, and its investment in Okhotsk was significantly diluted. Even if the appellant had wanted at that point to have this very minor ownership in a Russian private corporation valued, it would have been a very arduous task, and the result would surely have been very unreliable.
[36] The market value of AIMO’s investment in Okhotsk was only really determined at the time of the redemption, in August 2006, of the 429 shares for US$7,500,000, and it was not until then that it became possible to establish with some degree of certainty the fair market value of OREX’s investment in AIMO.
[1] 2013 TCC 356.