cross border financial planning
Canadian Tax Filers: Report Your Foreign Property Annually—Or Else
A lot has been made of the IRS’ onerous foreign-account and property-reporting requirements, and understandably so. But largely overshadowed by that discussion is a similar requirement that the CRA has inflicted on Canadian tax filers.
As part of its efforts to address tax noncompliance involving foreign property, CRA, in 2013, introduced a revised Form T1135 Foreign Income Verification Statement. Form T1135 now requires significantly more detailed information regarding foreign property owned by Canadian residents.
What’s more, the form must be filed by the taxpayer’s income tax return due date (generally April 30), and no extension is available. Taxpayers who fail to comply with the filing requirements face stiff penalties—up to $2,500 for late filing. Form T1135 is similar to the U.S. Form 8938, Statement of Specified Foreign Financial Assets. To assist our clients, we’ve put together the following Q&A summary about the T1135:
cross border financial planning
Q: Who is required to file Form T1135?
A: Any Canadian resident who, at any time during the year, owned specified foreign property with a total cost in excess of $100,000 is required to file Form T1135 for that taxation year. Individuals who immigrate to Canada are not required to file Form T1135 in the taxation year in which they first become Canadian tax residents (unless they were previously Canadian tax residents). However, Form T1135 must be filed for all subsequent taxation years, including a taxpayer’s year of departure from Canada. In addition to Canadian individual residents, Form T1135 must also be filed by corporations and trusts resident in Canada.
Q: What is specified foreign property?
A: The definition of specified foreign property is quite broad. It includes most non-Canadian assets, such as funds held outside of Canada, shares in non-Canadian corporations, indebtedness owed by a nonresident, an interest in a nonresident trust that was acquired for consideration, as well as real property situated outside of Canada. Specified foreign property excludes personal-use property, such as a vacation home.
Specified foreign property also includes most non-Canadian investments (i.e. U.S.-traded securities) held in Canadian non-registered brokerage accounts. Thus, in certain cases, taxpayers whose assets are all physically located in Canada may still be required to file Form T1135.
Q: What is new about the revised Form T1135?
A: It requires filers to disclose significantly more information regarding foreign assets. For each foreign asset, the revised form requires the following information to be disclosed on a per-asset basis:
- Name of the foreign entity holding the funds, name of the foreign corporation or foreign trust, or description of the foreign property;
- Country where the foreign asset is located;
- Maximum cost of the foreign asset during the year;
- Cost of the foreign asset at year-end;
- Amount of income (or loss) related to the foreign asset; and
- Amount of any capital gain (or loss) realized on the disposition of the foreign asset.
A: Yes, an exemption is available for reporting specified foreign property for taxpayers who have received Canadian tax slips related to such foreign property (e.g., a T3 or T5 slip). In these instances, no additional disclosure related to such foreign assets is required. However, while this relief may exclude specific reporting for foreign assets held in a Canadian brokerage account for which income has been reported on a T3 or T5 slip, it would not exclude foreign securities held in the same Canadian brokerage account for which there was no income to be reported on a T3 or T5 slip.
In addition, each stock or bond held in a foreign investment portfolio is required to be reported separately on Form T1135. This will require taxpayers to compile a significant amount of additional information.
Q: How is Form T1135 filed?
A: Taxpayers should begin collecting the necessary information to complete the T1135 early in the new year, rather than waiting until April 30, when the form is due. Form T1135 currently cannot be filed electronically. Taxpayers who electronically file their income tax returns should forward a signed copy of Form T1135 to the CRA by the due date.
Marc Gedeon is a CPA (U.S), CPA (Canada) and Tax Attorney at Cardinal Point, a cross-border wealth management organization with offices in the United States and Canada. Marc specializes in providing Canada-U.S. cross-border financial, tax, transition, and estate planning services. www.cardinalpointwealth.com This piece is for informational purposes only and should not be considered legal or tax advice. Online readers should not act upon this information without seeking professional counsel.