In the United States, qualifying taxpayers need to file certain tax forms to report their non-U.S. assets. Canadians are also required to report their foreign assets (non-Canadian) to the Canada Revenue Agency (CRA). This foreign assets reporting is required not only to report qualifying foreign financial accounts but other foreign assets, such as: rental properties, etc. as well. The form on which Canadians must file to report their non-Canadian assets is known as Form T1135, Foreign Income Verification Statement.
Many Canadians are still not aware of this filing requirement. Therefore, in this article we have prepared a brief overview on Form T1135 filing and penalties in case of non-compliance.
Form T1135 – Foreign Income Verification Statement
Form T1135 is a form that Canadian residents, whether individuals, corporations or trusts, must file in order to report their specified non-Canadian assets costing more than CAD$100,000. Note that, this $100,000 threshold is not based on the fair market value, but on the adjusted cost basis in Canadian dollars.
Property that must be reported includes:
- Funds in foreign bank accounts;
- Shares of foreign corporations (even if held in Canadian brokerage accounts);
- Interests in foreign mutual funds;
- Shares of Canadian corporations on deposit with a foreign broker;
- Debts owed by non-residents including bonds, debentures, mortgages, and notes receivable;
- Interests in a non-resident trust that was acquired for consideration;
- Land and buildings located outside Canada (foreign rental property);
- Tangible and intangible properties located outside Canada;
- Life insurance policies issued by a foreign insurer;
- Precious metals, gold certificates, and futures contracts held outside Canada
- Any rights to acquire a property described above;
- Interests in a partnership that holds any of the above unless the partnership files Form T1135
Form T1135 filing is not required if:
- The property is used primarily for personal use—that is, more than 50% of the time (e.g. a winter getaway)
- a share of the capital stock or indebtedness of a foreign affiliate (separate reporting is required for interests in these corporations)
- The property is held as part of an active business venture
- The assets are held in a foreign retirement plan or in a Canadian registered plan such as RPPs, PRPPs, RRSPs, RRIFs, RESPs, RDSPs, or TFSAs
- The assets are held within a Canadian-registered mutual fund
Filing Form T1135, Foreign Income Verification Statement
The Form T1135 is divided into two parts – Section A (first tier), and Section B (Second Tier).
Section A or First Tier is also called the ‘Simplified Reporting Method’. This section applies to taxpayers who held specified foreign property costing more than $100,000, but less than $250,000, throughout the year. Taxpayers have to simply check a box to identify the types of property they held during the year, without the need to provide details of each specified property. If the Canadian taxpayer has property in more than one foreign country, then they need to list the top three countries where the specified foreign property (SFP) is held. The top three countries should be based on the aggregate maximum cost amount of the properties held in each foreign country during the year. Along with these details, taxpayers will also need to provide the total amount of income earned from these properties as well as the combined gain or loss earned on the sale of all SPF.
Section B or Second Tier is called the ‘Detailed Reporting Method’. This section needs to be filed by taxpayers who own total specified foreign property with a cost base of more than $250,000 at any time during the year. Under the detailed reporting method, taxpayers need to report the following information for each of their foreign assets (Specified Foreign Property/SFP):
- Name of the person, corporation or trust holding the foreign asset
- Description of the foreign property
- Country where the SFP is located;
- Maximum cost of the SFP during the year;
- Cost of the SFP at year end;
- Amount of income (or loss) related to the SFP; and
- Amount of any capital gain (or loss) realized on the disposition of the SFP.
T1135 Reporting for Assets Held by Canadian Registered Securities Dealers
In the case of specified foreign (non-Canadian) assets held in an account with a Canadian registered securities dealer (or a Canadian trust company), taxpayers may use the “Aggregate Reporting Method”. Under this method, taxpayers have the option to aggregate assets held in the account, but must report the property on a country-by-country basis. The amount to be reported has to be the highest fair market value (FMV), which may be based on the highest month-end FMV that appears on the investment statements, but reported on a country-by-country basis. The combined income and losses, and gains or losses also need to be reported on a country-by-country basis.
T1135 Foreign Currency Value & Income Conversion
Finally, do keep in mind that the value of these specified foreign (non-Canadian) properties need to be reported both in Canadian dollars (CAD) and in the foreign currency. The exchange rate to be used to convert from the foreign currency to Canadian dollars should be based on the exchange rate in effect at the time of the transaction. That is, at the time the income was received from the property, or the exchange rate on the date the property was purchased. For income received from the specified foreign property (SFP) an average exchange rate may be used.
T1135 Non-Compliance Penalties
Canadians who meet the requirements but have not yet filed the Form T1135 when they should have, or need to file for the current tax year, should consider reaching out to a Canadian tax professional to help them prepare their T1135 form in CRA compliant manner. Canadians, who fail to comply with this requirement, could be subject to a penalty of $25 per day, to a maximum of $2,500. If they willing avoid filing Form T1135, the penalty could increase to $500 per month to a maximum of 24 months. Furthermore, if a demand to file has been issued by CRA, these penalties become much more severe.
The CRA currently has available a Voluntary Disclosure Program that may be an option for taxpayers who have not complied with their T1135 form filing obligation. If the CRA accepts a Voluntary Disclosure Application, the taxpayer will not be charged tax penalties or prosecuted for failure to file, omitting information in a T1135 form, or making false statements. Be careful and reach out to a tax practitioner as soon as possible if you have foreign (non-Canadian) assets costing CAD $100,000 or more that have not been reported.
Note that, even if for a particular tax year, the taxpayer does not need to file a tax return but is required to file Form T1135, they should file the T1135 form. If the CRA discovers that the taxpayer did not comply, the T1135 non-filing penalty could apply retroactively.
AG TAX LLP CAN HELP
If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of US and Canadian tax laws as well as cross-border compliance.
Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.
We can assist with:
- Canadian Personal and Corporate Tax Returns
- Cross Border Taxation and Business Planning
- US Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
To obtain a quote or to arrange for a tax consultation to discuss your US Canada cross border tax queries, please contact us at:
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