Confused about foreign income reporting? You’re not alone.
A STEP Canada panel expressed frustration yesterday over the new Foreign Income Verification Statement (T1135), which CRA released this past June. Taxpayers who hold foreign property with a cost of more than $100,000 must fill out this form.
Read: Tips to use the T1135
And as of Budget 2013, if CRA finds any errors on the T1135, it could extend a taxpayer’s reassessment (or statute-barred) period by three years, to six years total.
Problem is, many practitioners say the required information can be difficult or impossible to obtain, and it’s unclear whether CRA will penalize nominal mistakes with the same severity as false statements.
For instance, what happens if a taxpayer uses a $US conversion rate that’s slightly off to calculate foreign-company dividends?
“It would appear from Revenue Canada’s website that if there’s a false statement in the T1135 return, which includes an error, the extended statute-barred period applies,” says Bruce Harris, a partner at PwC in Toronto.
Another ambiguous part of the form: the new exclusion statement for taxpayers who’ve received a “T3 or T5 from a Canadian issuer in respect of a specified foreign property for a taxation year.” The statement continues, “That specified foreign property is excluded from the T1135 reporting requirement for that taxation year.”
But what if a corporate taxpayer that’s required to file the T1135 has a January 31 year-end, and receives a foreign dividend in January 2014? The T5 won’t be issued until later in the year. “Can you tick the box?” wonders Harris.
Another conundrum: let’s say someone owns more than $100,000 worth of two U.S. securities: Chase Manhattan, which issues quarterly dividends, and Apple, which doesn’t.
“The T5 would only show Chase dividends, and not Apple,” points out Harris. “I can check the box, but that only saves me from having to report the Chase info.” The taxpayer would still have to report the Apple shares.
And, in cases where someone owns more than two types of shares, “you’d have to go through your statements and figure out which ones have T5 dividends and which don’t to determine which ones you need to put on the form.” It may be simpler to report them all and avoid ticking the box, he adds.
The new T1135 also asks for the country related to the specified foreign property. But for corporations, the country of residence isn’t always the same as the country of incorporation, says Harris. Canadian law dictates a trust or corporation is resident where “central management and control” takes place (e.g., where the board meets).
Harris says practitioners have asked CRA for further guidance, and the agency’s said it’s forthcoming.
And it’s as if CRA anticipated this confusion: The new T1135 includes a checkbox asking if the return is an amended one.
But fixing mistakes could lead to further problems. “Does it signal that you made a mistake and automatically extend your statute-barred period?” Harris asks. “It’s almost as if they’re asking for perfection. If they’re going to have such a high standard, there shouldn’t be any ambiguity in the questions.”
Dale Franko, managing director with Moodys Gartner Tax Law in Calgary, addressed some questions from STEP members. They included:
1. Do Canadian stocks in a foreign brokerage account require a T1135 to be filed? What about Canadian cash?
Franko says cash should be reported, but it’s unclear whether stocks need to be. Bruce says, “When in doubt, report it.” Adds Franko, “More information is better, [and] we would hope more info would not be construed as a false statement” and therefore trigger the extended reassessment period.
2. Should ADRs be reported on the T1135?
Yes, says Franko, but their country of residence is subject to debate. ADRs trade on U.S. exchanges, but the underlying stocks are resident in other countries (e.g. Nestle, which is resident in Switzerland but trades on the NYSE). “We hope CRA will provide clarification,” says Franko.
3. Do Canadian mutual funds that own foreign property need to be reported on the T1135?
A Canadian mutual fund corporation or trust, regardless of holdings, is not considered foreign property for purposes of filing the T1135. However, a foreign mutual fund would be considered specified foreign property.
4. What country should you attribute timeshares to if the owner has the option to trade for properties all over the world?
If the timeshare is primarily for personal use, it’s not considered specified foreign property, says Franko. However, if it generates rental income, the country would be where the income occurred.
Read: CRA updates T1135 form