When a Canadian taxpayer owns "specified foreign property," which is generally any foreign investment property costing more than C$100,000 at any time in the year, they are required by the Canadian Income Tax Act to complete and file Form T1135, Foreign Income Verification Statement. This form must be filed by Canadian resident individuals, corporations and trusts, as well as many partnerships.
Updates to the rules and regulations surrounding Form T1135 were introduced in the 2013 tax year, adding significant complexity to the completion requirements. These changes also make the Form T1135 comparable to the foreign disclosure requirements of other jurisdictions such as the US Report of Foreign Bank and Financial Accounts (FinCEN Form 114) and Form 8938, Statement of Specified Foreign Financial Assets.
What is "specified foreign property"?
Foreign investment property that must be reported on the T1135 includes:
- amounts in foreign bank accounts
- shares in foreign companies, even if held in a Canadian brokerage account
- interests in non-resident trusts
- bonds or debentures issued by foreign governments or foreign countries
- life insurance policies issued by a foreign issuer
- interests or units in offshore mutual funds
- real estate situated outside Canada
- other income-earning foreign property
If the total cost of all the above properties owned at any time of the year exceeds C$100,000, then the T1135 must be filed. If two people are joint owners of specified foreign property, they would determine if the $100,000 has been exceeded based on their share of the cost of the property. There are detailed regulations on how the ‘cost’ of a property is calculated and some of the general rules for determining 'cost' are set out in the instructions to Form T1135.
Property held in a registered account such as an RRSP, TFSA or some foreign retirement accounts are not considered to be "Specified Foreign Property".
Foreign investment property also does not include:
- any property used mainly for personal use and enjoyment, such as a vehicle, vacation property, jewelry, artwork, or any other such property, and;
- assets used only in an active business, such as a business inventory or the equipment and building used in a business.
Further details on what is and is not included in the definition of "specified foreign property" are provided in the instructions to Form T1135.
Completing Form T1135
Prior to the 2013 tax year, the T1135 form was fairly straight-forward for most taxpayers. It was a one-page form in which the taxpayer was required to check boxes to indicate ownership of various amounts, types and geographical location of foreign property. No specific information was required. In an effort to combat perceived abuses by some taxpayers who fail to report foreign income, the Canada Revenue Agency (CRA) substantially revamped the form starting with the 2013 tax year. The revised form is much more stringent in its requirements in that the taxpayer is now required to provide detailed information on ownership of certain foreign property.
Due to the complexity and ambiguity of the new rules introduced for the 2013 tax year, there was considerable pushback from taxpayers and industry advocates. In response, the CRA announced some transitional relief on February 26th, 2014, which was only applicable for the 2013 tax year and provided for the following:
- The deadline for filing of Form T1135 for the 2013 tax year was extended to July 31, 2014 for all taxpayers, and
- Foreign property held in an account with a Canadian registered securities dealer was to be reported on a combined basis valuation at the end of the year, rather than providing the details of each individual security as required previously.
This was good news as individuals had been required to provide the value and details of each individual investment that was 'specified foreign property' held within an investment account. Under the transitional guidance, the total combined value of all such property at the end of the year could be reported as "Other property outside of Canada" in Category 6 of Form T1135. However, important to note is that this relief currently only applies to the 2013 tax year and it does not apply for any investment accounts that are held at a securities dealer outside of Canada that is not a registered securities dealer.
The updated T1135 filing requirement will continue to be a significant undertaking for people that move to Canada and continue to deal with a securities dealer abroad. They will need to continue to provide details for each of their individual investment properties if they are 'specified foreign property' and are held at a securities dealer outside of Canada. Also, there are currently no options to provide any of the T1135 information requirements electronically to CRA as Form T1135 still needs to be paper filed separately from the tax return. This is in contrast to other jurisdictions (such as the United States) where the foreign disclosure requirements can only be reported electronically.
Further changes to Form T1135 for 2014 and later taxation years
Those filing after the extended July 31, 2014 deadline must use the new form. The transitional reporting method has been revised slightly, allowing taxpayers to report aggregate amounts for foreign property held in an account with a Canadian registered securities dealer or a Canadian trust company, but on a country by country basis. This type of aggregate reporting is done in Category 7 on the new form T1135. The country code to be used for shares of a non-resident corporation is the country of residence of the corporation. For an investment in a US mutual fund trust that holds portfolio investments in several corporations that are resident in Europe and Asia, for example, the US country code would be used.
Potential Penalties and Opportunity for Voluntary Disclosure
There are substantial penalties for failure to comply with the Form T1135 requirements as well as other foreign disclosure requirements. The general penalty for failure to file can be up to C$2,500 per person per year. However, other penalties can be substantially higher for specific cases; see the Table of Penalties provided by CRA at the following link: www.cra-arc.gc.ca/tx/nnrsdnts/cmmn/frgn/pnlts_grd-eng.html. We continue to see increased scrutiny by CRA on foreign disclosure requirements and have reviewed numerous cases where these penalties have been assessed.
There may be opportunities to use the formal Voluntary Disclosure Program (VDP) to avoid some of these potential penalties for individuals who find themselves to be non-compliant and approach the CRA on a voluntary basis. Individuals should take care to consult a tax advisor that is experienced in cross-border tax issues when opting to take the VDP route to rectify non-compliance.
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The information provided is for general guidance only, and should not be utilized in lieu of obtaining professional advice.