Specified Canadian entities who own specified foreign property with an aggregate cost of $100,000 or more are required to report certain details regarding these properties each year by submitting Form T1135 Foreign Income Verification Statement. This form allows Canada Revenue Agency to assess if the taxpayer has properly reported their worldwide income on their income tax return.
Specified Canadian entities include most Canadian resident taxpayers. Individuals, corporations, partnerships, and trusts are all subject to the filing requirements. Many types of trusts are exempt from the requirement such as mutual fund trusts, employee benefit and profit-sharing plans, registered plans such as a RESP, RRSP, RRIF, RPP and RCA, and others. Partnerships may also be exempt if less than 10% of the income or loss for the period is attributable to Canadian resident partners.
Specified foreign property most commonly includes funds held in foreign bank accounts and other income earning foreign properties. These include shares of non-resident corporations, units of non-resident mutual funds, interests in non-resident trusts, tangible property situated outside Canada such as a foreign rental property, intangible property held outside Canada, debts owed by non-residents, an interest in a foreign insurance policy, an interest in a partnership that holds specified foreign property unless the partnership is required to file Form T1135, and property that is convertible into specified foreign property such as a call option. Shares of Canadian corporations that are held in a foreign brokerage account also must be reported.
Specified foreign property does not include a property used or held exclusively in carrying on an active business, a share of the capital stock or indebtedness of a foreign affiliate, certain exempt trusts, and personal-use properties such as a foreign vacation home, vehicles, jewelry or artwork. Canadian mutual funds held in a Canadian brokerage do not need to be reported, even if they are purchased in a foreign currency or primarily hold foreign assets.
It is critical that you properly track the Canadian cost base of your investment. The cost base is generally the amount you originally paid for the asset plus any additions over time, or the fair market value at the time it was inherited or gifted to you. The cost base must be converted to Canadian dollars based on the exchange rate in effect at the time. For example, if you purchased shares in a United States corporation for $80,000 USD when the exchange rate was approximately at par, the asset would not be required to be reported assuming you did not own any other specified foreign properties. If you purchased these same shares when the exchange rate was 1.35, the Canadian dollar cost base would exceed $100,000.
Immigrants to Canada are not required to complete Form T1135 in the year of immigration. However, the fair market value of your specified foreign property at the date of immigration needs to be converted to Canadian dollars based on the exchange rate in effect at that time. This value is your cost base to assess reporting requirements for future years.
There are two methods to report specified foreign property: the simplified reporting method and the detailed reporting method. The simplified method is available to taxpayers who own specified foreign property with a cost base between $100,000 to $250,000. This method only requires the taxpayer to check a box for each type of specified foreign property owned, report the top three countries in which you hold the assets, and report the total income and gains earned from these properties during the year. The detailed method requires you to provide a complete listing of all specified foreign property including a description of the property, country code, maximum cost during the year, cost at year end, and income and gains earned from the property during the year. The detailed method includes a separate section for property held in a Canadian brokerage account. This section requires less disclosure as you are only required to report the maximum fair market value during the year, fair market value at year end, and any income or gains earned from the property. This is reported on a country-by-country basis, rather than for each individual security. Brokerages typically provide a summary of this information with their tax reporting package.
Form T1135 must be filed by the due date of your tax return. There is a minimum penalty of $100 for late-filing this form, otherwise the basic penalty is calculated as $25 per day that the form is late-filed to a maximum of 100 days. The penalty could be as high as $1,000 per month up to a maximum of 24 months, or 5% of the maximum cost amount of specified foreign property, if it is determined that you failed to comply or made a false statement or omission knowingly or under circumstances amounting to gross negligence. Taxpayer relief provisions may be available depending on the circumstances.
If you believe that you may be non-compliant with your filing obligations, we should discuss your options as soon as possible. You may be able to request a waiver of interest and penalties under the voluntary disclosures program.
Form T1135 Foreign Income Verification Statement is an informational return that must be completed each year. Submitting an accurate and complete statement on a timely basis can prevent significant penalties from being assessed.
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