CRA’s revised Form T1135 requires taxpayers to provide significantly more information about their foreign property. This article explains the new rules.
Also read: T1135: 13 questions and answers
Who has to file a T1135?
A T1135 must be filed by:
- Canadian resident individuals, corporations and trusts that, at any time during the year, own specified foreign property costing more than $100,000; and
- partnerships that hold specified foreign property costing more than $100,000 and whose non-resident members’ share of income or loss is less than 90% during the reporting period.
An individual does not have to file a T1135 for the first year he or she is a resident of Canada.
Note the $100,000 threshold isn’t based on the fair market value, but on the adjusted cost base of the asset in Canadian currency.
What is specified foreign property (SFP)?
Subject to the exceptions noted below, SFP 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;
- Interests in a partnership that holds specified foreign property;
- 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.
There are many Canadian public corporations whose shares are trading on foreign stock exchanges; the shares of these corporations are not considered SFP if held with a Canadian broker.
What matters is not the currency of the holding, or the stock exchange where the investment is bought or sold. Canadian company bonds denominated in U.S. dollars are still Canadian. Canadian corporation stocks traded on the New York Stock Exchange are still Canadian and are therefore not considered SFP.
SFP does not include:
- Foreign property held in a Canadian-based mutual fund;
- Property used or held exclusively in the course of carrying on an active business;
- Foreign property held for personal use and enjoyment, such as a vehicle, vacation property, artwork, etc.;
- Foreign property held within registered plans like RRSPs, LIFs, RRIFs, LIRAs, TFSAs, RESPs and RDSPs;
- Assets held in a foreign registered pension account (IRA, 401K);
- Shares of a foreign affiliate;
- Interests in a non-resident trust that neither the taxpayer nor a relative had to pay for (e.g. an estate);
- Interests in or indebtedness of a non-resident trust that is a foreign affiliate.
What must be reported?
On the earlier version of the T1135, there was no need to identify particular foreign assets, or to give the precise cost.
For 2013 and subsequent years, the revised form requires the following for each foreign asset:
- Name of the entity holding the SFP;
- Name of the foreign corporation, name of the foreign trust or 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.
A new streamlined option
For taxation year 2013, CRA provided limited relief when a taxpayer received a T3 or T5 slip from a Canadian issuer with respect to a SFP. For the 2014 taxation year onward, the relief has been modified and made permanent.
Under the relief’s streamlined option, SFPs held in account with a Canadian registered securities dealer (or a Canadian trust company) can be aggregated and reported on a country-by-country basis. There is no need to segregate the SFPs by categories (shares, debt, etc.) as required under the more detailed method. The amounts that have to be reported are the highest fair market value during the year. This amount may be based on the highest month-end fair market value that appears on the investment statements. The fair market value at the end of the year must also be reported on a country-by-country basis.
In addition, the combined income (or loss) earned on all SFPs held at any time in the year, as well as the total gains or losses realized on the disposition of SFPs during the year, have to be reported on a country-by-country basis.
Detailed reporting on a SFP-by-SFP basis is still required when the SFP is not held in an account of a Canadian registered security dealer (or a Canadian trust company).
Amounts reported on the T1135 form are required to be determined in the applicable foreign currency, and then converted into Canadian dollars. Under the streamlined option, the average exchange rate for the year can be used to determine the highest market value during the year. To determine the fair market value at the end of the year, use the exchange rate applicable at the end of the year.
This aggregate reporting will now occur in a new Category 7 on Form T1135 (“Property held in an account with a Canadian registered securities dealer or a Canadian trust company”).
Filing the form
Form T1135 must be filed by the filing due date of the income tax return for the particular year. As of February 9, 2015, individual taxpayers can file this form electronically for the 2014 tax year. Corporations, trusts, and certain partnerships must still paper file for 2014. However, for taxation years prior to 2014, all taxpayers must paper file the T1135.
Extension of the normal reassessment period
In the past, unless an omission in a tax return was due to negligence, tax authorities were prevented from processing a reassessment for additional tax after the normal reassessment period (generally three years after the day a notice of assessment is sent to a taxpayer).
For 2013 and following tax years, the reassessment period will be extended by three years if a taxpayer has failed to report income from a SFP on his income tax return and the T1135 was not filed, was filed late, or included incorrect or incomplete information.
The penalty for not filing the T1135 is $25 per day, up to a maximum of $2,500. Additional penalties are possible if the taxpayer knowingly or negligently fails to comply.
Always keep good records of clients’ investment holdings. Trade confirmation slips can be evidence of cost amounts. And, when in doubt, file the T1135. There are no penalties for filing it even if it is not required.
Read: Last year’s tax traps