Canadian taxpayers who fail to report their foreign property to the Canada Revenue Agency (CRA), or who fail to do so properly, risk having their period of possible re-assessment extended to six years, from the usual three years, starting in the 2013 taxation year.
In addition, the re-assessment period resulting from a failure to file the T1135, the Foreign Income Verification Statement, in a timely and proper manner would apply to a taxpayer’s entire tax filing, and not just to issues arising from the improperly filed T1135, according to a CRA official speaking as part of a round-table tax panel at the national conference of the Society of Trust and Estate Practitioners Canada in Toronto on Tuesday.
“[It applies for] all purposes,” said Steve Fron, manager of a trust section in the income tax rulings directorate of the CRA. “[The re-assessment] is not just limited to the amounts related to specified foreign property.”
Individuals, as well as corporations and trusts, that own specified foreign property with a cost of more than $100,000 at any time in a taxation year must file a T1135 with the CRA every year, even if they have no income to report.
Specified foreign property includes most types of income-earning property held outside of Canada, other than personal property and property used in carrying on an active business. Failure to file the T1135 can result in a penalty of $25 a day for each day it’s late, up to a maximum of $2,500 for the year.
As part of the 2013 budget, the government announced the extension of the re-assessment period – to six years for individuals, seven years for corporations and mutual funds – in cases where the taxpayer failed to file the T1135 on time, failed to report the required information about each specified foreign property, or failed to include all amounts related to specified foreign property.
In the budget, the government announced it would require taxpayers to provide more detailed information regarding each foreign property, including the name of the foreign institution holding the funds; the country to which the property relates; and the foreign income generated from the property.
Tax practitioners on the panel at the STEP Canada conference queried the CRA official regarding what the agency was doing to clarify the rules governing the proper filing of the T1135, which both taxpayers and practitioners have often found too ambiguous.
For example, would the shares of U.S. company held in an account with a U.K.-based financial institution be considered a U.S. or a U.K source foreign property, a panelist asked. (The property would be considered U.S. source, Fron replied, as that is the residence of the corporation that issued the shares.)
“If ticking the wrong box [on the T1135] is going to extend your re-assessment period by another three years, then we’d like to have some really precise guidance,” said Michael Cadesky, managing partner with Cadesky and Associates LLP in Toronto, and former chairman of STEP Canada.
Fron said that the CRA recognized that there had been some degree of confusion as far as the proper filing of T1135s in the past.
As part of the 2013 budget, the government indicated that it intended to clarify the filing instructions on T1135s, and that it would continue with the process of developing a system to allow the form to be filed electronically. The T1135 is currently available only in paper form.
“The folks who are working on the re-designed form are well aware [of the lack of clarity issues],” Fron said. “They are working on redrafting the guidance – the instructions.”
Fron also said that taxpayers would be directed to a frequently-asked-questions page, dedicated to the T1135, on the CRA website.