Foreign Income Verification – Form T1135 Reporting

Who is required to file form T1135?

The Canada Revenue Agency (CRA) has been following up on taxpayers who need to report their foreign assets and income using Form T113. Failure to file results in punitive penalties; therefore, it is essential to understand the requirements to file Form T1135.

All Canadian resident taxpayers who, at any time during the year, owned specified foreign property with a total cost of $100,000 (Canadian) or more must file form T1135. The form T1135 must be filed even if some or all properties were sold before the year-end.

Taxpayers mean individuals, corporations, partnerships, and trusts.

What is specified foreign property:

Specified foreign property, as defined in the Income Tax Act, includes the following:

1. Funds held outside Canada (in bank or mutual funds, etc.).
2. Real estate outside Canada (unless mainly held for personal use and entertainment)
3. Shares in foreign companies.
4. Stocks of Canadian corporations held outside Canada (e.g., in a foreign brokerage account).
5. Interests in non-resident trusts.
6. Debts owed by non-residents to you by a foreign entity (government, individuals, corporations, etc.)
7. Life insurance policies from a foreign issuer.
8. Right to acquire a property that is foreign specified property (such as call options, stocks, warrants, etc.).
9. Other tangible and intangible property outside Canada.

What is not a specified foreign property:

1. Property used or held for carrying on an active business.
2. Personal use property (e.g., car, vacation property, jewelry, artwork, etc.)
3. Property held in a registered Canadian plan, such as a Registered Retirement Savings Plan (RRSP), Registered Retirement Income Fund (RRIF), Tax-Free Savings Account (TFSA), etc.
4. Interests in or a right to acquire any of the above-noted excluded foreign property.
5. Assets in certain foreign retirement accounts, such as a U.S. 401(k) or an Individual Retirement Account (IRA)
6. Canadian registered mutual funds invested internationally.

Simple and detailed method of reporting

After 2014, where the total cost of the foreign assets is less than $250,000 throughout the year, form T1135 can be filed using a simplified reporting method only requiring the name of the country where funds are held, total income from the assets and any gain or loss from the disposition of assets.
However, if the total cost of the foreign assets is $250,000 or more at any time during the year, a detailed reporting method is mandatory, which requires information separately for each property, including:

• Description of the property
• Name of country
• The highest cost amount of each property during the year and the cost amount at year-end
• Income generated from the asset, any loss or gain from the disposition of the assets.

Some of the challenges:

Depending on the amount and type of foreign assets and the information available, correctly filing form T1135 can be a time-consuming and challenging exercise. The reporting is based on the cost of the property, not the current value of the property. The cost generally refers to the “adjusted cost base” (ACB) of the property. In many cases, it might be challenging to determine ACB, such as partial sales, dividend reinvestment, renovation or capital improvement, additional investment of capital, etc.

For new immigrants, the cost would be equal to the property’s market value at the time of immigration. Similarly, in the case of inheritance or a gift, the cost amount is the property’s value on the date of receipt.

In the case of stock ownership, the corporation’s country of residence is relevant, not the stock exchange where they are traded. For example, you might hold a share of a company trading at the New York Stock Exchange (NYSE), but originally the company resided (operated) in some other country. These stocks will be reported based on their country of residence, not trading. On the other hand, some Canadian companies are listed on the U.S. stock exchanges. These will not be reported on Form T1135 because these are “Canadian properties.”

Filing deadline:

The deadline for filing Form T1135 is the same as the income tax return for individuals, corporations, and trusts.

The penalty for late filing this form is $25 per day up to a maximum of $2,500. CRA may impose additional penalties if the failure to file was done knowingly or under circumstances amounting to gross negligence or if it persisted after 24 months.

Penalties for not filing or late filing:

Usually, CRA can assess a return for three years; however, due to non-filing, late, or incorrect filing of Form T1135, this period may extend to six years. Delinquency related to Form T1135 allows CRA to reassess the entire, not just Form T1135.

If you are late in filing Form T1135 or incorrectly reported the information, you might take advantage of CRA’s Voluntary Disclosure Program (VDP). CRA’s Voluntary Disclosure Program provides concession and waiver of some potential penalties where taxpayer voluntarily comes forward to complete or correct the reporting. Once the CRA has identified your file or notified you, you can’t use the Voluntary Disclosure Program.

Source Accounting Professional Corporation (CPA) is a full-service accounting firm in Mississauga, helping individuals, business owners, investors, trading companies, and consultants by providing tax preparation, tax advisory, corporate tax filing, accounting, bookkeeping services, payroll solutions, and other services. If you are an individual, business owner, trading company, or investor and need tax advice on a personal and business, we invite you to give us a call at 647-930-8130.

Disclaimer: The above contents are provided for general guidance only, based on information believed to be accurate and complete, but we cannot guarantee its accuracy or completeness. It does not provide legal advice, nor can it or should it be relied upon. Please contact/consult a qualified tax professional specific to your case.