The March 2013 Federal Budget promised changes to the T1135 form – Foreign Income Verification Statement wherein more detailed disclosures would be required and in return the CRA would compile better instructions on how to complete the form. In addition, the CRA is considering implementing the ability to file the form electronically by individuals for the 2014 tax year.
Accordingly, in June 2013 the CRA rolled out a revised T1135 form in which each investment would require separate disclosure:
* Funds held outside of Canada
* Shares of non-resident corporations that are not foreign affiliates
* Indebtedness owed by a non-resident
* Interests in non-resident trusts
* Real property held outside of Canada
* Other property held outside of Canada
* Options and derivatives
Each investment disclosure would include:
* A description of the property
* The country code (such as US, UK etc.)
* Maximum cost of the investment at any time in the year
* The cost of the property at year end
* Income/loss from the investment, and
Gain/loss reported on disposal of the investment
The exception to detailed disclosure on the T1135 form would apply if income from the investment was reported on a T3 or a T5. However, the investments comprised in the T3 or T5 would become part of the property used to determine whether the $100,000 minimum threshold was reached. Taxpayers would still need to review their portfolios on an investment by investment basis such that they could be exempt from the reporting requirements for one year but not the next. As such, it would seem that taxpayers would not get away from performing their own detailed analysis regardless of this exception. Further, the exception has been removed for years after 2013.
Punitive penalties were the next volley by the CRA to taxpayers who didn’t apply their due diligence in analyzing their portfolio of investments and property and who failed to include the completed T1135 disclosure. Late filed T1135 forms would attract a $25/day late filing penalty to a minimum of $100 and a maximum of $2,500. Further, penalties would escalate should the taxpayer be found guilty of gross negligence.
If this were not enough salt in the wound, the CRA extended the reassessment period from three to six years for the entire return (not just the foreign property reporting) for a taxpayer who failed to report income from foreign property, AND the T1135 form not filed on time or contained inaccuracies.
You can imagine the outcry—not only from the investment brokerage firms but tax professionals who prepare income tax returns! The result was that the CRA offered some transitional relief for the 2013 tax year filing. The deadline to submit the T1135 was extended to July 31, 2014. Further, the detailed disclosure requirement was eased for investment accounts that were held at a “Canadian Registered Securities Dealer” or “Canadian Trust Company.” The CRA allowed reporting of the investments by account rather than by security and the taxpayer could choose to report the investments by their highest FMV during the year rather than cost. The taxpayer could chose this detailed reporting or a T3/T5 exception for all qualifying accounts.
Fast forward to July 8, 2014 where the CRA implemented more changes to the T1135 reporting for 2014 and later years. The new T1135 form must be used after July 31, 2014 (the old T1135 should be used for all 2013 year late filings.)
The “transitional rule” has been modified and extended, as follows:
* Taxpayers who hold a specified foreign property in an account with a Canadian Registered Securities dealer or Canadian Trust Company, will have the following modifications:
o Option to report the aggregate value of all such property, but on a country-by-country basis.
o Total value to be reported is the highest fair market value at the end of any month during the year.
o The fair market value at the end of the year must also be disclosed.
o The aggregate income (loss) earned in the year must be disclosed.
o The gain/loss realized on dispositions during the year must be reported.
* The aggregate reporting will be disclosed on a new table; Category 7 on Form T1135 “Property Held in an account with a Canadian Registered Securities dealer or Canadian Trust Company.”
* The aggregate reporting for unit trusts will no longer be required due to the extended aggregate reporting method described above is available to unit trusts in respect of their accounts with Canadian Trust Companies.
* The reporting exception which excluded certain property form the detailed reporting requirement where a taxpayer has received a T3 or a T5 is now eliminated.
Country-by-country reporting example:
On investment account comprises both US and UK investments. The highest month-end fair market value of the US investment is $275K, April 30. The highest month-end fair market value of the UK investment is $175K, Sept 30. The highest month-end fair market value of the combined foreign investments is $350K, July 31 ($250K-US, $100K-UK). According to the CRA, the taxpayer should report $275K for the US investments and $175K for the UK investments.
Other reporting information and considerations:
o Report gross income—not net
o Report total gain/(loss)-not the taxable gain/(loss)
o Joint-ventures do not file the T1135—the individual venturer’s own the assets so they would report their pro-rata share
o Foreign rental properties:
o Report gross income—not net
o Cost of depreciable assets is UCC
o Consolidate capital assets of the property (eg. Land, building, appliances)
o Foreign currency translation-use the exchange rate in effect at the acquisition date and the exchange rate in effect at the fair market value date
o Joint accounts provide another challenge-currently no directive from the CRA on whether the reporting of joint accounts should be on an attribution basis (how the income has been reported in the past) or on a true ownership basis
o Personal versus income use foreign properties may need to be considered
One of the ongoing challenges with the foreign reporting requirement and the changes to the level of disclosure required is the onus on the taxpayer to compile all the detailed information necessary for the tax preparer to complete the T1135 Form as accurately/completely as possible. Taxpayers or their investment brokers haven’t had to compile this level of detailed information before. In many instances the investment broker may not have the date or cost of the investment particularly if the investment from transferred from another investment firm. As such, it is imperative that taxpayers begin the process of compiling this information now as the 2014 tax filing season is soon upon us. Taxpayers should contact their investment advisors to find out what information they can provide to them to help with the compilation of the information and to streamline the “list” of information that the taxpayer needs to provide themselves to their tax preparer.
Given the complex nature of this legislation, taxpayers should be prepared that the compilation and disclosure of such information on their tax returns will have a cost—however, this can be somewhat mitigated by having the information organized when you meet with your tax professional.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.
This post has been prepared for general information purposes. It is not advice. The information presented may not fit your unique situation, please consult one of our trusted business advisors at RHN CPA for further clarification and interpretation of your particular circumstances.