As Canadians, we are very active in the global economy. In fact, many Canadians have foreign investments in countries from the United States to China. This article explains the foreign property reporting requirements that Canadians have with the Canada Revenue Agency.
Foreign Property Reporting to the CRA
Individuals looking to grow their wealth will often look to foreign investment opportunities to take advantage of attractive emerging markets, underpriced properties, and to diversify their portfolios. As an investor, you need to be aware of all factors prior to making investment decisions, including tax consequences.
Many Canadian taxpayers (including individuals, partnerships, corporations, and trusts) are unaware that they are required to disclose ownership of foreign investment properties if the cumulative cost of all foreign properties exceeds $100,000. This reporting is done by annually filing Form T1135, Foreign Income Verification Statement, with the Canada Revenue Agency (CRA). Failure to do so can result in significant penalties.
What is the T1135?
The T1135 is an Information Return that discloses ownership of specified foreign properties.
Specified foreign property includes:
• foreign bank account balances
• shares of non-resident corporations (shares held in registered plans such as RRSP and TFSA are exempt)
• tangible property held outside Canada (i.e.: land and buildings)
• intangible property held outside Canada (i.e.: patents and copyrights)
• debts owed by non-residents
• interest in a non-resident trust (may include a family trust)
• interest in a partnership that holds specified foreign property
• convertible property that can be changed for specified foreign property
• precious metals, futures, gold certificates held outside Canada
Please note that the following are not specified foreign property and do not have to be reported on the T1135: • property used exclusively to carry on active business
• shares of a foreign affiliate
• personal-use property (i.e.: vacation homes, vehicles, etc.)
In addition, you need to report the cumulative cost of foreign properties (no need to report exact costs of each foreign property) and total income earned during the year from these properties.
Although this form does not have an impact on taxable income, the CRA issues significant penalties for failing to annually file the T1135. The penalties range from $25 per day (with a minimum $100 penalty) to a maximum of $2,500 or higher in cases of gross negligence.
Who must file Form T1135?
Canadian residents who own foreign investment property with a cumulative cost base (original purchase price) exceeding $100,000 (in Canadian dollars) must file Form T1135. Cumulative cost is determined by totaling the cost of each foreign investment property owned, even if they are in multiple foreign jurisdictions. For example, if you own $60,000 of investments in India and $60,000 of investments in USA, you will be required to file a T1135 since your cumulative cost base exceeds $100,000.
It is important to note that in calculating cumulative cost, you need to take into consideration foreign investments “held at any time during the year”. So if you buy and sell investments during the year, the cost base of these investments will have to be included in the cumulative cost even if you do not hold the investment at the end of the year.
If you unknowingly failed to file the T1135 for current and previous tax years, we strongly recommend that you file historical T1135’s under the Voluntary Disclosure Program (VDP). Provided that you acted in good faith and have a valid reason for not disclosing income and information, the CRA may waive the penalties.
New Reporting Requirements
Starting on July 31, 2013, the CRA issued an amended Form T1135, which requires taxpayers to disclose more detailed information. Going forward, for each specified foreign property the following information is required:
• a description of the asset;
• the country in which the asset is held;
• the cost base at the end of the year, the highest cost base during the year, and any income or gains resulting from sale of the asset.
Having to report additional information about each foreign asset will result in significantly more work for taxpayers. As a result, these new foreign property reporting requirements could become very burdensome for foreign investors.
The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.