Reporting Foreign Property: Form T1135 Canadian resident individuals, corporations, partnerships and trusts must report holdings of specified foreign property which collectively cost $100,000 or more at any time in the year. The July 2014 version of the form must be used for any filing of the form after July 31, 2014. If total cost of all the specified foreign property is $100,000 or more all the property is to be reported. For example if the entity has foreign shares of $40,000 and foreign rental property of $75,000 the total is $115,000 and both have to be reported. In the above example, the shares are sold by the end of the year so at the end of the year only foreign property held is less than $100,000. Both properties still need to be reported since at some time in the year, there was specified foreign property with costs in excess of $100,000. Remember to report gross foreign income on both form T1135 and the actual income tax return (T1, T2 etc). Specified Foreign Property includes: tangible property located outside Canada including real estate and rental properties; shares in a non-resident company even if held in a Canadian brokerage account; Interests in mutual funds that are organized in a foreign jurisdiction; Debts owed by non-resident persons, such as government or corporate bonds, debentures, mortgages, notes receivable and promissory notes; debts owed by a non-resident person (e.g., bonds issued by foreign entities); funds or intangible property situated, deposited or held outside Canada; for example, foreign bank accounts or shares of Canadian companies deposited with a foreign broker; interests in non-resident trusts except trusts not acquired for consideration or trusts which are foreign pension plans or foreign retirement arrangements; an interest in an insurance policy that is deemed under the foreign investment entity rules to be a participating interest in a foreign entity; interests in partnerships that hold specified foreign property (unless 90% or more of their income or loss for the fiscal period ending in the taxpayer's taxation year would be attributable to nonresidents); an interest in or right with respect to a non-resident entity (such as a corporation, trust, or partnership); any interest or right, immediately or in the future, absolute or contingent, in specified foreign property; any property which by its terms or any related agreement is convertible to or exchangeable for specified foreign property; Precious metals, gold certificates and futures held outside of Canada; and Patents, copyrights or trademarks held outside of Canada.
Exclusions from Specified Foreign Property include: property that is used or held exclusively in the course of carrying on an active business in Canada of the reporting entity; shares or debt of non-residents corporations that are foreign affiliates of the reporting company (because form T1134 must be filed instead); A bank account denominated in a foreign currency at a Canadian bank or Credit Union; an interest in a non-resident trust that was not acquired for consideration by the filer or a person related to the filer (presumably because the reporting requirements of forms T1141 and T1142, discussed below, deal adequately with such trusts); foreign pension plan and employee benefit trusts and foreign retirement arrangements (example, U.S. IRAs); an interest in a partnership which is itself subject to filing requirements (because 90% or more of income or loss is attributable to non-residents); a right with respect to, or indebtedness of, an authorized foreign bank (i.e., a Canadian branch of a foreign bank) that is issued by, and payable or otherwise enforceable at, a branch in Canada of the bank; personal-use property of the reporting entity such as a recreation, or vacation property used primarily as a residence; and an interest in or right to acquire property that would be excluded by virtue of the preceding items. Entities that do not need to File: Other: Mutual Fund Corporations; Mutual fund trusts resident in Canada; Non-resident owned investment corporations; Corporations exempt from tax under Part I of the Act; A registered investment under Section 204.4 of the Act; Trusts described in paragraphs (a) to (e.1) of the definition of trust in subsection 108(1) of the Act. Theses trusts include employee trusts, amateur athletic trusts, RDSP, RESP, RRSP, RRIF, TFSA, inter-vivos religious congregation trust, RCA trust, and a cemetery care trust; A trust or corporation that is a registered investment for RRSP s RRIF, and DPSP; Partnerships, all the members of which are corporations or trusts described here; Partnerships where the share of the partnership s income or loss for non-resident members is 90% or more of the income or loss of the partnership; and Persons other than corporations or trusts exempt from tax under Part I of the Act. A mutual fund resident in Canada that invests in foreign properties or securities is not specified foreign property. If in doubt, if it issues a T3 slip, it is Canadian. A foreign mutual fund, not resident in Canada will be specified foreign property. Reporting for Investments Held Through a Canadian Registered Securities Dealer: Each property may be reported in the appropriate category (1 through 6 on the form) or The properties may be aggregated on a country by country basis for each dealer and reported in Category 7 on the form. If the choice is to report in Category 7 for property with aggregate cost base greater than $100,000 the reporting is done on the fair market value of the properties. Both the maximum fair market value in the year is required and converted at the average annual exchange rate and the fair market value of the investments at the fiscal year end converted at the fiscal year end exchange rate. 2
The maximum cost amount during the year can be based on the maximum month-end cost amount during the year. The maximum fair market value during the year may be based on the maximum month end fair market value. CRA s official position is to report the month end fair market value by country within the same investment account where there is more than one country of residence of investments in that account. In most situations, you will likely use the highest month end fair market value for all investments with a particular broker, as this is the information most readily available. Income Reporting: Income, including capital gains or losses on the disposition of the specified foreign property must be reported on the T1135 and on the income tax return. The income to be reported on the T1135 is the gross income. Canadian capital gains should not be netted against capital losses from foreign property on the T1135. Foreign Currency Conversion Filing: Maximum funds held during the year Use the average exchange rate for the fiscal year. Funds held at year end Use the exchange rate on the last day of the fiscal year. Maximum fair market value during the year Use the average exchange rate for the fiscal year. Fair market value at year end Use the exchange rate on the last day of the fiscal year. Exchange rates are available from the Bank of Canada at http://www.bankofcanada.ca/rates/exchange/ Apparently CRA is working on a system to allow electronic filing of the returns but until such time the form must be paper filed. The form must be filed annually if there is specified foreign property and the criteria outlined above are met. The due date is the same as the entity s income tax return due date. If it is a partnership filing the form, the due date is the same as the due date for the partnership information return even if the partnership might otherwise meet the exception for filing the T5013. The form should be sent to: Ottawa Technology Centre Data Assessment and Evaluations Program Verification and Validation Other Programs Unit 875 Heron Road Ottawa ON K1A 1A2 Penalties: 1. The basic penalty is $25.00 per day with a minimum of $100 to a maximum of $2,500 for each annual return that is late filed. This penalty will automatically be applied if the T1135 is simply sent to the CRA after the due date. If the penalty will be material, consideration should be given to making a voluntary disclosure. However, the Voluntary Disclosures Program has a one year overdue criteria for the program to apply. Alternatively, application could be made for a waiver of the penalty under the taxpayer relief provisions. However, success in this area requires meeting all relief requirements and getting CRA approval. Therefore these provisions should not be relied upon unless absolutely necessary. 3
2. If a demand to file is ignored or the initial return is not complied with, knowingly or in circumstances amounting to gross negligence, there is a further penalty of $500 per month to a maximum of $12,000. This penalty is reduced for any penalty in 1. above. 3. This maximum is doubled where CRA has demanded a return and it was still not filed. So it becomes $1,000 per month to a maximum of $24,000. Again this is reduced for any penalties in 1. above. 4. After 24 months in this latter case add an additional penalty of 5% of all the cost amounts that were to have been reported on the return. 5. False statements or omissions made knowingly or in circumstances amounting to gross negligence are subject to penalties of the greater of $24,000 and 5% of all the cost amounts to have been reported on the return. Assessment or Reassessment Period The normal assessment or reassessment period for the income tax return is extended by 3 years in situations where: a) The taxpayer failed to report income from a specified foreign property on the income tax return; and b) The form T1135 was not filed on time or a specified was not identified or was improperly identified on the Form T1135. It would appear that missing a small specified foreign property or not reporting a small amount of foreign income is enough to trigger the extended reassessment period. Once this provision applies, it can apply to reassessments with respect to domestic income, not just the foreign income. At this time it is unclear what happens to the reassessment period if the original form is incorrect and the taxpayer amends the form to correct the reporting thus bringing the deficiency to CRA s attention. In conclusion, it is better to file when don t need to than to not file when should have. Preparing the T1135 correctly takes additional time and care. Specific Problem Areas Due Diligence At this time there is no due diligence exception applicable to the T1135 form. The new T1135 form is more complicated, more time consuming to complete and more costly if a mistake is made. There are no shortcuts to preparing the form. Using Estimates There may be a temptation to use estimates in order to complete and file the form on time. However there are risks to this approach. CRA has not provided any guidance on correcting errors on an amended form. If CRA considers the estimate to represent missing information or that some of the prescribed substantive elements of the form are incorrectly stated by the taxpayer, the form may be considered invalid. There is no due diligence defense available to reduce or eliminate the penalties. Day Trading If the trading constitutes a business, the foreign properties do not need to be reported on the T1135. However, whether trading is a business or an investment is not always clear. The risk is that if the 4
position taken is that the trading is a business and CRA later successfully argues that there is no business then the T1135 penalties discussed above apply. Foreign Investment Accounts Foreign investment accounts held by a foreign brokerage do not have the same reporting options that Canadian brokerage accounts do. Each investment must be reported. They cannot be aggregated. Joint Accounts Since foreign assets must be reported based on ownership, each joint account holder must report his or her proportion of the foreign investments, income and gains. Residence of Foreign Properties CRA has indicated that if the appropriate country of residence of a particular foreign property cannot be determined, the country code chosen should be Other. However, given the penalties for the T1135, a reasonable effort should be made to determine the country of residence for the property and not to just select other to complete the form because that is easy. Foreign Mutual Funds In Canada a mutual fund can be either a corporation or a trust. It may not be apparent if a foreign mutual fund is a trust or a corporation. This determination is necessary to know which section of the form to report the fund in when the investment is not held through a Canadian brokerage account such that the aggregation option is not available. Real Estate It is not clear how much detail is required to be reported. A foreign rental property may include land, building, equipment, furniture etc. CRA has not indicated if they want the cost of the rental property as a whole or for each component. If available, it is likely best if there is breakdown between land and the cost for each UCC class is reported. (Original cost, not the remaining UCC balance). If there is other capital, non-depreciable property it should be reported as well. Personal vs. Income Properties Where a property is used for both personal and rental purposes, it is the primary use of the property that determines if the property is personal use or income producing. If the personal use is more than half the time or the property is rented without reasonable expectation of profit, then it is likely a personal use property. Joint Ventures A joint venture is not a separate entity and does not file a T1135. Each co-owner should determine its share of the underlying of the specified foreign property and report that in addition to any other foreign property the co-owner may have. Use of Client-Provided Summaries CRA wants the required information entered directly on the T1135 form and to use more than one form if necessary. It will however accept a client prepared form if and only if it is in the identical format as the 5
tables on the form T1135. CRA will not accept any other methods of providing the required T1135 information. Information to Gather to Prepare the T1135 Monthly investment statements; Cost information for investments not held through a brokerage account; T- slips or foreign income reporting slips or obtain summary schedules for the fiscal year from the broker; Obtain the fiscal year end rate (exchange rate on the last day of the fiscal year) from the Bank of Canada. Obtain the annual exchange rate for the fiscal year. It is possible to print out monthly exchange rates for any period from the Bank of Canada site then to manually calculate the average rate for that period. Review income by investment by country. Some of this information may be obtained from a review of the T slips or foreign equivalents to the Canadian T slips. Determine country of residence of the investments. Determining the residence of a public corporation may be difficult. Even though the stock might trade on a US stock exchange the may be resident in a country other than the US. Steps You Might Take to Reduce Reporting or Costs of Reporting Hold foreign investments through Canadian mutual funds; Hold foreign investments through Canadian brokerages rather than through foreign investment accounts; Ask more questions of investment advisors to ensure understanding of what types of investments are held and the reporting requirements; Track cost base of foreign investments annually rather than just when necessary for reporting a disposition; Keep foreign investments in a separate brokerage account rather than mixing both Canadian investments and foreign investments in the same account; Starting in 2014, there is an overall cost of integration of 9.12% for earning foreign income in a CCPC. You may wish to consider holding foreign investments personally or in an RRSP or RRIF. (note: since an RRSP or RRIF is not taxable on its income, you will lose the benefit of any foreign tax credit) 6