CRA has expanded the T1135 Foreign Income Verification Form, and the new version applies to tax years starting after June 30, 2013.
Clients must file the form if, at any time during a given tax year, they owned specified foreign property costing more than $100,000. The form applies to people, corporations and trusts, and partnerships where a Canadian’s share of the partnership income or loss is more than 10%.
U.S. and overseas bank accounts count as foreign property, so clients must list the financial institutions, country, maximum funds held during the year, funds held at year-end, and the income or loss on those accounts for the year. The only things you don’t have to list are account numbers.
Even more cumbersome: shares of non-resident corporations held during the year have to be individually listed, with their maximum cost amount during the year, cost amount at year’s end, income or loss, and gain or loss on sale. Similar requirements exist for:
- debts or loans owed by non-residents,
- interests in non-resident trusts,
- real property outside Canada (except for personal use and real estate used in an active business), and
- other property outside Canada.
If the client inherited foreign property, or received it as a gift, the cost amount is the fair market value at the time it was received. For spousal reporting, ownership and reporting of foreign property is based on the amount contributed by each person. A shared account with a combined value of $180,000 wouldn’t have to be reported if the husband and wife had each contributed half, as long as it’s their only foreign property. But a contribution by either spouse of more than $100,000 means the person making that large deposit has to file the T1135.
Given the detail on the form, expect that CRA may review taxpayers with investments in low- or no-tax jurisdictions to ensure they’re complying with foreign reporting requirements.
Late filing can mean a $2,500 penalty per year. Taxpayers who’ve missed reporting obligations should consider filing voluntary disclosures.
Clients don’t have to file the form if…
- the investments are held by a trust governed by an RRSP;
- they’re first-year immigrants. After that year, the cost amounts are the fair market value of the investments on the date they entered Canada.
Also, if clients received a T3 or T5 from a Canadian issuer in respect to the specified foreign property, the form requires less detail (but the T1135 must still be submitted when the limits are met).
Canadians exempt from T1135 reporting requirements must still pay tax on income they earn on foreign property.
Reporting income on offshore investments
Offshore investment fund rules apply to investments in non-resident entities, particularly when that entity’s value comes primarily from portfolio investments (including real estate), and if CRA could reasonably conclude the client holds the investment to reduce taxes paid. If that’s the case, the taxpayer must include in income:
- the cost of the investment multiplied by the prescribed rate plus 2%;
- less the income (other than capital gains) received from the investment.
The cost base increases each year by the amount of the income inclusion. For the first nine months of 2013, the rate’s deemed to be 3%, and may increase further.
Stella Gasparro, CPA, CA, is a tax and assurance specialist at MNP LLP.