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Foreign Asset Reporting and the Extreme Costs of Non-Compliance
Several years ago form T 1135 was added to our tax returns for individuals, corporations, partnerships and trusts. It is a simple form that has been often overlooked and non-compliance has been high. More than likely this has been because the form does not enter into the calculation of income tax payable.
Unfortunately the penalties for not completing this form are extreme as one large Canadian Corporation group found recently when a judge ruled against the Asper group of companies. Penalties for non filing were enforced even though the company reported all the income from these investments properly.
So what is this form and why is it required? As has been reported in the press both here in Canada and south of the border, governments are concerned with offshore money escaping taxes in the home country. As a resident of Canada and most other western countries, you are taxed on world wide income. This form is simply to track those assets offshore which have the potential to earn income and otherwise escape tax if not reported.
Canada Revenue Agency requires Canadian resident taxpayers to report specified foreign property with an aggregate cost in excess of $100,000 at any time during the year.
Specified properties include the following:
- Foreign bank accounts
- Interest in foreign trusts (mutual funds)
- Foreign bonds, treasury bills and other debt instruments
- Shares in foreign corporations
- Real estate
- Other income earning property
Excluded properties include:
- Property used to carry on an active business
- Assets held in Canadian registered plans such as RRSP’s
- Property held primarily for personal use such as vacation property, art, and antiques
If you have a large diversified investment portfolio, you should speak with your investment advisor to determine whether or not you might fall into the reportable categories.
You also need to determine whether or not you, your spouse or both own a property as individuals report separately and the for jointly-owned property, it is the contributed amount that is the determining factor.
Even if you are not required to file a personal tax return, you will be required to file a T1135 if your properties cross the threshold.
Foreign property does not include a U.S. IRA
If you rent out your foreign condo, that you also use for personal use, you may be required to report.
You are not required to report US securities if they are owned within a Canadian mutual fund.
If you inherited a property, your cost base is the fair market value at the time of inheritance.
Penalties are harsh. Penalties begin at $25 per day to a maximum of $2,500. If you knowingly fail to file or fail to file through gross negligence, penalties are $500 per month for the first 24 months to a maximum of $12,000. More severe penalties exist for false statements and omissions.
For further information, please visit CRA’s page for completing the T1135 including frequently asked questions.