New T1135 Reporting Rules for Foreign Assets - New Requirements for Detailed Disclosure By: Scott Cummings, National Director, Wealth Management Taxation March 25, 2014 Overview As residents of Canada we are taxed on our worldwide income. The government has become increasingly concerned that not all of this income is being reported. One of the measures in the 2013 Federal Budget was to crack down on international tax evasion and aggressive tax avoidance. As a result, Canada Revenue Agency (CRA) introduced an updated Foreign Income Verification Statement (Form T1135). Also, in recent years, there have been more cases landing in the Federal Court concerning the late filing of the Form T1135. CRA has been able to defend its decision to assess severe penalties on late filings.
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Foreign property used or held exclusively for active business purposes and personal-use is excluded from reporting.
Examples of foreign property that is not required to be reported on Form T1135: •
Reporting Foreign Income – The Basics
Who Has To File?
Since 1998 all Canadian resident individuals and: • Trusts; • Corporations, and in some cases; • Partnerships have been required to disclose ownership of “Specified Foreign Property” or foreign investment property costing more than $100,000, at any time during the year, on a Foreign Income Verification Statement (Form T1135). What Has To Be Reported?
For reporting purposes, foreign investment property includes: •
Funds held outside Canada;
Shares of non-resident corporations; All amounts owed to you by a nonresident person; Interests in non-resident trusts; and Real property outside Canada.
Foreign investments held inside a RRSP, RRIF, TFSA, and RESP ; Canadian-resident mutual funds or ETFs, which invest in foreign securities; and Real estate properties outside of Canada, which are only used for personal use.
Filing Deadline Form T1135 must be filed by the tax reporting deadline, generally April 30th for living individuals. The Foreign Income Verification form must be filed even if you have no tax payable during the year. Penalties for Non-Reporting Neglecting to file, filing the form late or filing incorrectly can be costly. The penalty for failing to file the form is $25 per day up to 100 days (minimum $100 and maximum $2,500). Where the failure to file is done knowingly or under circumstances amounting to gross negligence, the penalty jumps to $500 per
month for up to 24 months (maximum $12,000) less any penalties already levied. The New Reporting Rules An updated Foreign Income Verification Statement (T1135) was recently released to support the new foreign property disclosure rules. The criteria for those who must file the form and the penalties for failure to file have not changed. However, the updated form requires a significant degree of information and details surrounding specified foreign property.
Taxpayers will need to include the following additional information on the new Form T1135= • • • • •
Description of property or indebtedness; The name of the specific foreign bank holding funds/property outside Canada; The specific country where the foreign property is held; Maximum funds held during the year or cost amount of the property (previously only a range of value was required), and; The income and/or gain (loss) on disposition generated from the foreign property.
Form T1135 excludes certain property from the detailed reporting requirements. The reporting exclusion provides that where the taxpayer has received a T3 or T5 slip from a Canadian issuer for a specified foreign property, the details of that particular specified foreign property do not have to be disclosed on Form T1135. The 2013 Federal Budget also proposed to add a three-year extension to the normal assessment period for income tax returns for taxpayers who fail to file the form or have provided incorrect information on the form.
This means that a tax return will not be statute barred until six years after the date of the original notice of assessment if a taxpayer is found to fail to comply with the Form T1135 reporting requirements. Transitional Rules – Only applicable for the 2013 taxation year Prior to the newly announced transitional rules, an exclusion was provided only if the taxpayer received a T3 or T5 slip from a Canadian issuer regarding the specified foreign property (as mentioned above). However, if the taxpayer held a specified foreign property with a Canadian registered securities dealer, which was not reported on a T3 or T5 slip, the security would still need to be listed separately by the taxpayer under the new T1135 requirements. This made it extremely difficult to obtain information for investment accounts holding a large quantity of foreign securities. On February 26, 2014, the CRA announced options to help taxpayers transition to these new reporting changes. As a result, taxpayers holding foreign property will have an extended filing deadline for the T1135 form only for the 2013 tax-reporting year. The extended deadline is July 31, 2014. In addition, if a taxpayer does not use the T3/T5 exclusion, the information for foreign property held in an account with a Canadian registered securities dealer may be reported on a combined basis rather than reporting the details of each security.
Transitional Account-By-Account Reporting on the T1135 Form To use the transitional account-by-account reporting, taxpayers will need to enter detailed account-level information on section 6 “Other property outside Canada” on the T1135 Form.
If a taxpayer chooses to use the 2013 transitional reporting method, the taxpayer must use this reporting method for all accounts with a Canadian registered securities dealer.
This transitional reporting measure is only available for the 2013 tax filing. Therefore, we will continue to work with CRA to propose reasonable solutions to the T1135 reporting requirements in future years beginning with the 2014 tax reporting year.
If you have not disclosed or fully disclosed your foreign investment property in prior years, please contact us to find the best way to bring your reporting up to date. This may involve working through the Voluntary Disclosure Program. We are here to assist you with all of your personal and trust compliance needs.
For More Information
With CRA strengthening the foreign income reporting requirements, you should review your foreign property holdings.
For further information regarding Form T1135 and the new transitional rules, the CRA has provided a Frequently Asked Question section along with a summary on their website. It can be accessed under the following link. http://www.craarc.gc.ca/E/pbg/tf/t1135/README.html
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