The 2013 Federal Budget introduced significant revisions to the form, procedure and penalties associated with the reporting of foreign investments held by Canadian-resident taxpayers. Generally, a greater degree of detail is being required than in the past. The $100,000 cost threshold remains the same in principle, though its application has necessarily been modified to align with the more detailed reporting requirements.
The new Form T1135 Foreign Income Verification Statement (“Form T1135”) is available on the Canada Revenue Agency (CRA) website, either as a printable PDF or a fillable/saveable PDF. The form may be attached to the relevant tax return or information return (see “Filing deadline” within), or be sent separately.
To be clear, Form T1135 must be paper-filed with the CRA. The ability to electronically file the form is being developed and will be announced by the CRA when this becomes available.
Who must report?
All Canadian-resident taxpayers –- individuals, corporations, partnerships and trusts (including non-resident trusts deemed to be Canadian-resident) – are required to file the revised Form T1135 if, at any time in the year, the total cost amount of all “specified foreign property” to the taxpayer was more than $100,000.
“Specified foreign property”
While not an exhaustive list, the scope of property subject to reporting includes:
- funds held outside Canada;
- shares of non-resident corporations (other than foreign affiliates);
- indebtedness owed by non-residents (other than from foreign affiliates);
- interests in certain non-resident trusts;
- real property situated outside Canada (other than personal-use property and real property used in an active business); and
- other types of foreign property, such as intangible property not used in a business and certain rights under contract.
Where the taxpayer has received a T3 or T5 slip from a Canadian issuer, that particular property is excluded from the T1135 reporting requirement for that taxation year.
Canadian mutual funds
Taxpayers will not have to report with respect to holdings in Canadian mutual funds, whether in the form of a trust, corporation or ETF trust. This is explicitly addressed in the CRA’s Q&A Web page:
Q. Does Form T1135 have to be filed if the cost amount of the units in a mutual-fund trust is $150,000 and if the mutual-fund trust invests entirely in foreign securities?
A. If the mutual-fund trust is resident in Canada, you do not have to file Form T1135. Residency status is not determined by the type of investments held by a mutual fund trust or mutual fund corporation.
The use of a U.S.-dollar-denominated account with a qualified Canadian issuer will not expose a taxpayer to the T1135 reporting requirement. Per the CRA’s Q&A Web page:
Q. Does foreign property include Canadian-issued term or equity products denominated in non-Canadian dollars (for example, a Government of Canada Treasury bill denominated in American dollars)?
A. Foreign property that must be reported on Form T1135 does not include term or equity products denominated in a foreign currency if the issuer is a resident of Canada.
As well, whereas directly held U.S. securities, U.S. mutual funds and U.S.-listed ETFs may contribute to U.S. estate tax costs, there is no exposure for U.S. securities held in Canadian mutual funds or Canadian-listed ETFs.
The $100,000 threshold
The requirement to report is based on the cost amount of each specified foreign property. If at any point in the year the total of those costs exceeded $100,000, the taxpayer must report all of the holdings even if year-end values have fallen below this threshold or a property is no longer owned at year-end.
Where ownership is shared, it is the taxpayer’s pro-rata share that is relevant, even in the case of spouses. For example, if the only relevant property had a $180,000 cost base and was jointly owned, neither spouse would have to report. However, if either of them had contributed over $100,000 to that cost, that spouse would have to file the Form T1135.
Potential penalties:
- Failure to comply – $25/day up to 100 days
- Failure to furnish foreign-based information – $500/month up to 24 months, or $1,000/month up to 24 months once a demand is issued
- Additional penalty – After 24 months, 5% of adjusted cost base (ACB) or fair market value (FMV), as applicable
- False statements and omissions – Greater of $24,000 or 5% of ACB or FMV, as applicable
If the T1135 is not filed in a timely manner, a reassessment may be made up to three years past the normal reassessment period.
Filing deadline
In the case of a T1, T2 or T3 return, Form T1135 must be filed with the CRA on or before the filing due date of the related tax return or, in the case of a partnership, the filing due date of the T5013 – Partnership Information Return.
Beginning this year, a reminder of the T1135 reporting obligation will be included on the Notice of Assessment for taxpayers who have ticked the “Yes” box on their tax returns indicating specified foreign property with a total cost of more than $100,000.