Another good reason to have an accountant – Rules change on foreign reporting

In 1997, the Canada Revenue Agency (CRA) proposed changes on how foreign property is reported. In 1998, CRA introduced the reporting of certain foreign property by requiring all Canadian tax filers to answer, “Did you own or hold foreign property at any time in 1998 with a total cost of more than CAN $100,000?” If you answered “yes” to this question then you were required to complete a “Foreign Income Verification Statement” – CRA and accountants refer to this form as T1135. In my experience, the biggest misunderstanding people have relates to the term “foreign property” and what is included and excluded. An accountant is invaluable in providing guidance in complex areas such as these.

Since 1998, modifications have been made to the T1135 but the form was relatively easy to complete as CRA provided broad monetary ranges for disclosure (i.e., $100,000 to $300,000; $300,000 to $500,000; etc.) and broad categories (i.e., shares of foreign companies without the name of the companies or the investment firm, real estate without the specific location, bank accounts without the name). This information was all that was required, along with a general indication of where the foreign property was held.

In June 2013, CRA released a new version of T1135, to be applicable for 2013 and later taxation years. CRA then delayed its application so that it would only apply for taxation years ending after June 30, 2013. The new version of T1135 was very detailed and many tax practitioners felt it was too onerous. The new T1135 required more detailed information on each specified foreign property. The additional information would require the following for each specified foreign property: name, country code, institution, maximum cost during the year, year-end cost of the property, income or loss, and capital gain or loss.

Accountants and financial advisors were sorting out the logistical nightmare of these new requirements. Many individuals who prepare their own income tax returns are likely unaware of the new requirements or the penalties for not complying.

After listing the new requirements, CRA complicated it further by providing exclusions from the detailed reporting, including specified foreign property where the Canadian resident received a tax slip (T3 or T5). CRA provided different options with respect to how the new T1135 form could be completed (i.e. standard reporting method versus transitional reporting method).

Near the end of February 2014, CRA announced new transitional relief for Canadians who must comply with the more detailed T1135 information reporting. At this stage, the transitional relief applies only for the 2013 taxation year. This relief is only allowed for investments that you received a T3 or T5 for the income. Other investments that issue slips such as a T5013 do not meet the exclusion and must be listed in detail. This relief is intended to assist taxpayers in transitioning to potentially the more onerous reporting requirements in future years. The transitional relief will allow CRA time to respond to concerns raised by Canadian residents.

One of these reliefs relates to individuals who have foreign property held in non-registered investment accounts with Canadian securities dealers. Rather than reporting the above details of each specified property individually (i.e. each individual stock), investors are able to report the combined “market value” of all such property at the end of the 2013 taxation year.

To illustrate we will use John Smith whose only foreign property is the 30 US stocks he holds in non-registered account 999-99999 with ABC Financial. For illustration purposes only we also assumed that the T3/T5 reporting exception is not being utilized for any specified foreign property. As of December 31, 2013 Mr. Smith’s book value on his USD investment account is $150,000 USD, and the market value is $250,000 USD. The USD to CAD dollar exchange rate on December 31, 2013 is 1.0636 per the Bank of Canada website. The USD to CAD dollar average exchange rate for 2013 is 1.0299148 per the Bank of Canada website. Mr. Smith received a T5 slip totaling $9,000 USD in income on his US dollar denominated account. Mr. Smith’s investment advisor sent him a realized gain (loss) report showing a net realized gain on 2013 dispositions of $14,300 CAD on his US holdings. The first step is to determine if the “book value” of certain foreign property exceeded $100,000 CAD at any time during 2013. Mr. Smith’s case is easy as his book value clearly exceeded $100,000 CAD on December 31, 2013 – he is required to file the T1135. The 2013 relief mentioned above allows Mr. Smith to greatly simplify the reporting with respect to his US dollar brokerage account in section six of T1135. Under Description of property he can enter “ABC Financial Account # 999-9999”. Under Country code he enters CAN even though he owns stocks in the US and other countries. Under Maximum cost amount during the year he can enter “0”. Under Cost Amount at year end he enters the “market value” in Canadian dollars of the account at the end of 2013 which is $265,900 (calculation: market value $250,000 US x year end exchange 1.0636). Under Income (loss) he enters the converted amount of $9,269.23 (calculation: income $9,000 USD x average exchange 1.0299148). Under Gain (loss) on disposition he reports the $14,300 amount from the realized gain (loss) report that his advisor already sent him which is denominated in CAD dollars.

The above analysis should not lead people to do the form themselves unless they understand all the reporting requirements thoroughly. It is by no means a comprehensive explanation of the revisions. I would strongly urge any person who has foreign holdings (outside of registered accounts) to discuss their reporting obligations with their accountant and advisor. Under the CRA website (cra-arc.gc.ca) you can search for T1135 (and other foreign disclosure forms) to obtain general information and answers to commonly asked questions. The website also has a table of penalties for not filing various disclosure forms applicable to your situation. As an example, Mr. Smith could be fined $25 per day (up to a maximum of $2,500) for not filing the T1135. If CRA feels that Mr. Smith knowingly didn’t file the form the maximum fine is $500 per day (up to a maximum of $12,000). The penalties above can also apply to prior years, albeit the prior year’s forms were relatively simple to complete and the taxpayer may have innocently not filed because they were unaware of the requirement to file.

The deadline to file Form T1135 has been extended to July 31, 2014 for all taxpayers. Currently, the T1135 form cannot be electronically filed. Most tax correspondence on Vancouver Island goes to the Surrey Taxation Centre; however, the paper copy of this form must be mailed to the following address: Ottawa Technology Centre, Data Assessment and Evaluations Program, Verification and Validation, Other Programs Unit, 875 Heron Road, Ottawa ON K1A 1A2.

This article is intended as a general source of information and should not be considered as personal investment, tax or pension advice. We are not tax advisors and we recommend that individuals consult with their professional tax advisor before taking any action based upon the information found in this publication.