July 11, 2013
T1135—Foreign Reporting Issues
For the last 15 years, Canadians have been required to identify and disclose if they own or hold foreign property as part of filing their annual income tax returns. Canadian taxpayers are required to file a Form T1135 by the income tax return filing deadline if they own, or hold, foreign property with a cost of more than $100,000 CDN.
What constitutes foreign property and what should you report?
While this may not seem like an overly complicated question, it inevitably raises a few interesting questions, usually in the dwindling days of April. Here are some examples:
- Example 1
Jack holds his investments with a Canadian brokerage firm. Included in his non-registered investment account are shares of Apple Inc. that have a cost of $120,000. Every year Jack receives a T5 slip reporting the dividends he receives from these shares, which he includes in his income.
Is a T1135 required? Yes. Jack owns shares of a nonresident corporation and these shares constitute foreign property. It does not matter that all of the income is being reported annually on both a T5 slip and on Jack’s personal tax return. Nor does it matter that the shares are held in a Canadian brokerage account. He still must file Form T1135.
- Example 2
Jill owns a condo in Arizona which she purchased in 1991 for $95,000. She rents this condo 100% of the time to arm’s length parties. She also holds shares of the TD Bank with a cost of $10,000. These TD shares are held in an account with a brokerage firm that is located in the Cayman Islands.
Is a T1135 required? Yes. Although the TD shares are not foreign property on their own, the fact they are held in a foreign brokerage account means that these shares are considered property held outside of Canada. Therefore, the total foreign property is $105,000. However, if the Arizona condo was not rented and was for personal use only, it would not be considered specified foreign property, and no T1135 would be required.
T1135 can be complex
The above examples are fairly straightforward. However, with the increasingly more sophisticated planning that clients are undertaking; the issues surrounding T1135 reporting become problematic. Consider, for example, where one spouse transfers foreign shares to the other spouse for less than fair market value consideration to which the provisions of subsection 74.1(1) of the Income Tax Act apply. Who has the requirement to report the foreign property, and who reports the income earned from this investment on the T1135?
Late T1135 Penalties
Failure to file Form T1135 on time may result in penalties that accumulate at the rate of $25 for each day you are late, up to a maximum of $2,500. If CRA determines that your failure to report constitutes “gross negligence”, the penalties jump to $500 for each month, up to a maximum of $12,000. However, if you are able to file under the Voluntary Disclosure Program, you may be able to become compliant and avoid these harsh penalties.
2013 Federal Budget changes
The 2013 Federal Budget proposes a number of changes to Form T1135 which will require more detail to be provided. These will include the name of the specific foreign institution or other entity holding the funds outside of Canada; the specific country to which the property relates; and the income generated from the property.
Clients should be considering this now and taking steps to compile this information so that they are ready by the filing deadline for next year.