If your clients own certain foreign property costing more than $100,000, they have to report it to CRA using the T1135 Foreign Income Verification Statement.
The T1135 requires Canadian taxpayers to report certain information regarding their interests in what’s known as specified foreign property (SFP) if the total cost base of the property exceeds $100,000 (all figures in Canadian dollars).
Read: Understanding the new T1135
There are two reporting methods:
- the simplified method for taxpayers with SFP between $100,000 and $250,000; and
- the detailed method for taxpayers with SFP in excess of $250,000.
In both the simplified and detailed method, taxpayers are required to disclose (among other information) the total amount of income produced by the SFP as well as any capital gains or losses realized during the calendar year.
The T1135 reporting requirement, as well as disclosure of income and capital gains (losses), can be confusing. This is especially the case where specified foreign property is jointly owned with a family member, particularly where the attribution rules apply. Let’s use an example to illustrate.
Example of joint ownership
John and Sally are spouses and recently purchased a U.S. rental property for $150,000. The U.S. rental property is a SFP. John contributed $75,000 cash and gifted $75,000 cash to Sally toward the property purchase. Under the attribution rules in the Income Tax Act (ITA), John must report 100% of the income and capital gains earned on the property since he solely contributed to the purchase of the property. That is, regardless of the fact that the property is held in joint tenancy with Sally, John reports all income and capital gains on his personal tax return.
As a result of these attribution rules, many taxpayers are left wondering what they should report on the T1135. In John and Sally’s case, assuming the U.S. property is the only SFP they own, must John file a T1135 given the fact that only he contributed to the purchase of the U.S. rental property, which cost $150,000 and therefore exceeds the $100,000 threshold? In addition, how is any income or capital gains reported on the T1135; must John report all income and capital gains because of the attribution rules, or must John and Sally each report their respective shares?
Fortunately, CRA recently clarified this issue. In layman’s terms, CRA said that for T1135 reporting, it does not distinguish between a legal owner and a beneficial owner and therefore, each owner would simply report their share (i.e., ownership interest) as specified foreign property. In John and Sally’s case, each spouse’s interest in the SFP would have a total cost of $75,000, which falls below the $100,000 minimum threshold individually; neither spouse would have to file the T1135.
Read: Should coupled clients have joint accounts?
What happens to personal tax reporting?
With respect to the income and capital gains reporting, CRA also commented that the T1135 reporting requirements were independent of any related income reporting requirements with respect to the attribution rules.
To illustrate, let’s say John and Sally had actually bought an SFP for $300,000. Sally contributes $150,000 cash and gifts $150,000 to John, taking them above the T1135 threshold and triggering the attribution rules for income (i.e., Sally must report all income and capital gains on her personal return related to the $300,000 property).
Under these circumstances, both Sally and John would each have to submit their own Form T1135s. Their T1135s would include not only their ownership interest in the SFP ($150,000 each), but also their 50% respective share of any income or capital gains realized on this property — without consideration for the attribution rules. That is, even though Sally, as John’s spouse, would be required to pay income tax on 100% of any income or gains earned on the SFP due to the attribution rules, she would only be required to disclose her 50% share of income and/or gains on the T1135.
Downside of joint ownership
Some taxpayers may consider gifting and holding an asset in joint ownership with a family member to bring themselves below the T1135 threshold so they don’t have to file the form. If they do this, make sure they understand they may trigger the attribution rules and that the gifting taxpayer may have to report all gains and/or income, depending on whom the gift is made to. Help them weigh the benefits of avoiding the form versus the application of the attribution rules.