Primer on foreign property

In 1996, legislation was passed requiring Canadian residents to disclose foreign property.  The threshold at that time was $100,000 Canadian, and the Canada Revenue Agency T1135 form was called Information Return Relating to Foreign Property.

There was plenty of discussion regarding the motives behind this new disclosure.  Some countries levy a capital tax based on net worth.  Others  have an estate tax.  The gathering of this information would certainly be useful if Canada one day ventured down this unpopular path.

Fourteen years later, we still have the same $100,000 threshold.  As you can imagine with the threshold staying constant, but prices rising over this period, more people today have to complete the T1135 form, now called Foreign Income Verification Statement.

Over the past couple of years, many Canadians have purchased (or have considered purchasing) US and foreign property.  We also have many people acquiring property in Canada and residing here who are citizens of other countries.

If you were a deemed resident of Canada in 2010, you have to answer the following question on your tax return:  Did you own or hold foreign property at any time in 2010 with a total cost of more than CAN $100,000?  If you do own foreign property of more than $100,000 then you are required to complete the Foreign Income Verification Statement (form T1135).

The types of foreign property are laid out into six categories:

  • Funds held outside Canada
  • Shares of non-resident corporations, other than foreign affiliates
  • Indebtedness owed by non-residents
  • Interests in non-resident trusts
  • Real property outside Canada
  • Other property outside Canada.

The form provides some further guidance on the property that is specified foreign property.  It also provides guidance on what is not considered foreign property including property in your RRSP, registered retirement income fund (RRIF) or registered pension plan (RPP); mutual funds registered in Canada that contain foreign investments; property you used or held exclusively in the course of carrying on your active business; or your personal-use property.

The above question and form (if applicable) is a regulatory requirement based on historical information or events that have already occurred.  Information is being shared between countries, and computer systems enable data to be audited more efficiently.  We recommend completing this form with help from a professional accountant who has appropriate tax knowledge.  Tax and financial planning today is more complicated, especially for clients who explore opportunities outside of Canada.

To help people with foreign property and income questions we gather as much information as possible.  This discussion begins with obtaining your accountants name and contact information.  Depending on the level of complexity, we would have an initial discussion with your accountant to obtain an understanding of your current tax situation.

Other information we gather are:  citizenship, residency, asset listing (including foreign property), and types of income (including foreign sources, such as pensions).  There are many US and foreign citizens who reside in Canada.  Tax and investment planning for these individuals are more complicated than Canadian born citizens who reside in Canada.

This is a difficult topic to discuss in a single column.  However, we have summarized our top ten items that we feel are important for people to discuss with their financial advisor and tax accountant :

  • Foreign House/Condo Purchase – If you have purchased real property in the US or foreign country is the property for your personal use or will it generate income?
  • US and Foreign Shares – If you have added shares of a US or foreign corporation to your portfolio, discuss the above reporting requirements and current/future tax consequences with accountant.
  • US and Foreign accounts Bonds – If you have added US or foreign government, state, municipal or corporate bonds, reporting requirements and tax consequences.
  • US and Foreign Bank Accounts – Factor into holdings and whether the T1135 disclosure is necessary.
  • UK Pensions – British expatriates are able to move pension benefits to Canada.  Speak with your financial advisor and accountant to discuss options.
  • Non-US Mutual Funds – American citizens residing in Canada should understand the changes to US tax for these investments.  Canadian mutual funds are now classified as a corporation rather than a trust.
  • Income Trusts and Pooled Funds – US citizens residing in Canada should understand the changes to US tax for these.
  • Registered Education Savings Plan – This type of account is classified as a foreign trust in the US (required IRA forms 3520 and 3520A) and we recommend that you discuss the reporting requirements and tax consequences with your accountant.
  • Tax Free Savings Accounts – This type of account is classified as a foreign trust in the US (required IRA forms 3520 and 3520A) and we recommend that you discuss the reporting requirements and tax consequences with your accountant.
  • US and Foreign Property – We recommend you speak with your financial advisor and accountant prior to purchases of foreign property to ensure you understand the tax and planning consequences.