INFocus: New requirements for Canadians with offshore property and income

Date: August, 2013 Map of the world with an arrow on Ontario

This article was originally published in the Comments Summer ’13 Issue.

Form T1135 is the “Foreign Income Verification Statement,” which must be filed on an annual basis by taxpayers (including partnerships) who own “specified foreign property” and such property has a cost of over $100,000 at any time during the year.

A “specified foreign property” generally includes any investment held in a foreign entity and funds held in a foreign institution. Personal use property, such as a vacation property, is not considered a “specified foreign property.” Form T1135 provides information on foreign investments and funds held by taxpayers outside Canada and discloses the amount of income earned therefrom. For the 2012 and prior taxation years, Form T1135 was a one-page form that was relatively easy for your accountant to complete.

As part of its commitment to combat international tax evasion and aggressive tax avoidance, the Canadian government recently revised its Form T1135 to require detailed information about foreign assets held by Canadian resident taxpayers, making the form more onerous to complete. This measure was originally announced in this year’s Federal Budget (Jobs, Growth and Long-term Prosperity – Economic Action Plan 2013).

In addition to revising Form T1135, the government has also introduced a law to extend the reassessment period of a tax return, where the taxpayer failed to report the income from a specified foreign property and the form was not filed on time or was filed incorrectly.

Revision of Form T1135:

The Canada Revenue Agency (CRA) has recently revised Form T1135 requiring Canadian taxpayers to provide detailed information about their assets held outside Canada. The previous version of the form only required very general information about the location of the specified foreign property and the combined income earned through investment in those properties. The revised form will require taxpayers to provide the following additional information regarding each specified foreign property:

  • The name of the specific foreign institution or other entity holding funds outside of Canada.
  • The name of each non-resident corporation in which the taxpayer owns shares.
  • In addition to the maximum cost amount during the year of the specified foreign property, the taxpayer is also required to report the cost amount of the property at year-end.
  • The foreign income generated and amount of gain/loss on disposition from each specified property.
  • The country to which each specified foreign property relates.

The revised form requires taxpayers to indicate, if the form being filed is original or whether it is being amended to report a change to the previously filed form.

According to the instructions listed on the revised Form T1135, if the reporting taxpayer received a T3 or T5 slip from a Canadian issuer in respect of a specified foreign property for a taxation year that specified foreign property is excluded from the reporting requirement. The exclusion appears to be an administrative concession from the CRA to eliminate the burden in situations where the brokerage has already reported the foreign income and provided a copy of the income tax slips to the CRA.

The reporting exclusion should not be confused with the requirement to file Form T1135. If a Canadian resident taxpayer owns a U.S. stock portfolio with a cost of over $100,000 CAD and receives at the end of the year a T5 reporting dividend income from the stocks, then the taxpayer is no longer required to report the details about the foreign investment on Form T1135. Although, the form itself must still be prepared and filed on time by checking the box indicating that the specified foreign property is subject to the exclusion. Where there is no T5 slip issued in respect of a specific foreign corporation, all the details about the specified foreign property must be reported on Form T1135.

Taxpayers are required to use the revised Form T1135 for taxation years ending in 2013. The form is due on the same date that the taxpayer’s income tax return is due for filing. An individual taxpayer must therefore indicate on the form if the individual or the individual’s spouse is self-employed. For partnerships, the due date for filing Form T1135 is the same date that the partnership information return is due.

Taxpayers who fail to file a Form T1135 on time or file it with inaccurate or incomplete information will be subject to substantial penalties imposed by the CRA.

Beginning in 2013, the CRA will include a reminder of the obligation to file Form T1135 in the following tax year in their notices of assessment to taxpayers, where these taxpayers have checked the box ‘yes’ on the previous year’s income tax return indicating that they had specified foreign property of more than $100,000.

In the 2013 Budget, the Department of Finance acknowledged that taxpayers might find the instructions to complete Form T1135 unclear. Therefore, the CRA has clarified its instructions for the completion of the form and has posted a list of frequently asked questions related to the completion of the form on its website.

Extended Re-assessment period:

In the Budget, the Department of Finance proposed to amend the Federal Income Tax Act to extend the normal reassessment period by three years. This would occur where a taxpayer fails to report income from a specified foreign property on their annual income tax return and Form T1135 was not filed on time, or included incorrect or incomplete information concerning a specified foreign property.

The increased re-assessment period is extended to the taxpayer’s entire tax return, not just the specified foreign property to which Form T1135 applies.

Summary:

Given that the re-assessment period could be extended by an additional three years, if Form T1135 is filed late or incorrectly, it is imperative that all taxpayers owning specified foreign property gather the required information from the appropriate parties in advance of tax preparation time to ensure that their T1135 forms are filed timely and accurately. It will be difficult to gather and disclose all of the information required if it is left to the last minute.

Specific professional advice should be obtained prior to the implementation of any suggestion contained in this article.

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