Foreign property

The changes were announced in the 2013 federal budget documents issued by the Department of Finance Canada, the so-called “Economic Action Plan.”

Form No. T1135 was “implemented to help counter international tax evasion and aggressive tax avoidance,” says Philippe Brideau, senior media relations advisor in the public affairs branch of the CRA in Ottawa.

The basic reporting requirement has not changed, Brideau says: “A taxpayer must file Form T1135 if, at any time in the year, the total cost amount of all their ‘specified foreign property’ was more than $100,000. This includes, but is not limited to, specified foreign property held in Canadian institutions.”

However, as a result of the 2013 changes, more detailed information now must be reported by the taxpayer. These include, says Brideau, “the names of specific foreign [financial services] institutions and countries where offshore assets are located, the foreign income earned on those assets and the maximum cost amount of those assets during the year.”

“Specified foreign property” is defined to include: foreign bank accounts; shares of foreign companies other than foreign affiliates; shares of Canadian corporations held outside Canada; debts owed by non-residents, including government and corporate bonds, debentures, mortgages and notes receivable; interests in certain non-resident trusts; interests or units in offshore mutual funds; real estate situated outside Canada, other than personal-use property or property used in business; and other tangible and intangible property, such as patents and copyrights situated or deposited outside Canada.

When the changes to Form No. T1135 were first announced, the CRA required taxpayers to report “very specific and expanded disclosures on a security-by-security basis,” says Henry Korenblum, a chartered accountant and manager, tax, with Toronto-based accounting firm Crowe Soberman LLP.

Under the initial changes, taxpayers were required to state the names of each foreign property; the country and institution where they were held; the income, loss or capital gain on each investment during the taxation year; and the highest cost amount for each investment during the year and the cost at the end of the year.

Feedback from the investment industry, however, led to fairly substantial relief – at least, on a temporary basis, says Korenblum: “The tax and financial [services] community raised concerns about the volume of the detailed information required and the challenges taxpayers would face in meeting the expanded reporting requirements.”

That feedback eventually led to the CRA announcing “transitional reporting relief for the 2013 taxation year,” adds Korenblum, “which included a streamlined reporting method and an extended filing deadline to July 31, 2014, for all taxpayers.”

The transitional relief allows Canadians to report aggregate amounts for foreign property held with registered securities dealers and Canadian trust companies on a country-by-country basis.

This revision contrasts with the initial changes, which included providing full details of each property separately.

In addition, the CRA provides for a temporary exception from the new detailed requirements in cases where a taxpayer receives T3 or T5 slips: these slips include information about income from some types of foreign property held by the taxpayer.

The CRA issued a revised version of the T1135 form in February 2014 to reflect details of the transitional relief.

Subsequently, on July 8, 2014, the CRA announced permanent relief for the 2014 and later taxation years.

This permanent relief extends the transitional requirements but eliminates the reporting exception for instances involving T3 or a T5 slips.

The requirement to report the maximum fair market value during the year also may be based on the maximum monthend fair market value, according to the CRA.

Despite these changes, the new T1135 requirements “are quite onerous,” says Michael Fromstein, a chartered public accountant with Integrated Professional Specialist Services in Toronto who specializes in tax planning.

For example, Fromstein says, taxpayers now must track monthend values of their foreign holdings for their tax reporting. This change contrasts with the usual requirement of keeping track of only yearend values. Although Fromstein understands the objectives of the CRA, he believes the Canadian disclosure requirements are “unnecessarily strict.”

The need for the more detailed reporting seems unnecessary, Fromstein points out, as there is limited scope for tax evasion in accounts that are held with a Canadian licensed broker.

However, the CRA evidently remains convinced that it requires more details about foreign properties held by Canadians.

“Form T1135,” Brideau says, “provides the [CRA] with valuable information about the nature, amount and location of the foreign asset holdings of taxpayers.

“The T3 slip – Statement of Trust Income Allocations and Designations,” Brideau adds,”or the T5 slip – Statement of Investment Income – only discloses the income associated with these assets. Therefore, the T3 and T5 do not provide the CRA with all the required information.”

Concludes Brideau: “This additional information gathered through the Form T1135 will significantly strengthen the [CRA’s] ability to identify, audit and investigate cases involving taxpayers who may be hiding offshore assets and income.”

It seems clear that taxpayers need to abide by the new rules, justified or not, and keep in mind that these regulations have arisen in a radically new, global environment for policing aggressive tax evasion. (See story on page B3.)

“As the Canadian government continues to crack down,” Korenblum says, “on aggressive tax avoiders and the underreporting of offshore income – even when some of the holdings are located with Canadian financial services institutions – it is imperative that taxpayers disclose and comply with the new T1135 filing requirements accurately.”

Failure to do so can result in stiff financial penalties, which escalate sharply in accordance with the length of the delay in filing.

© 2014 Investment Executive. All rights reserved.