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Foreign asset reporting in Canada
From tax expert Gerry Vittoratos
March 2, 2020
The Income Tax Act (ITA) requires all Canadians to report foreign assets held that are above a certain threshold. Here are the detailed rules of this reporting.
Requirement to file the T1135
As per ITA 233.3, all Canadian residents (which includes Canadian corporations) who hold specified foreign properties whose overall costs surpass $100,000 Canadian at some point in the tax year have to report their foreign assets. This is done through the T1135 - Foreign Income Verification Statement form. The only taxpayers that are excluded from this rule are immigrants, who are not required to report foreign assets in the first year of residence [ITA 233.7].
Assets required to be reported
The specified foreign properties that must be reported are as follows [ITA 233.3(1)]:
· funds or intangible property (patents, copyrights, etc.) situated, deposited or held outside Canada;
· tangible property situated outside of Canada;
· a share of the capital stock of a non-resident corporation held by the taxpayer or by an agent on behalf of the taxpayer;
· an interest in a non-resident trust that was acquired for consideration, other than an interest in a non-resident trust that is a foreign affiliate for the purposes of section 233.4 of the Act;
· shares of corporations resident in Canada held by you or for you outside Canada;
· an interest in a partnership that holds a specified foreign property unless the partnership is required to file Form T1135;
· an interest in, or right with respect to, an entity that is a non-resident;
· a property that is convertible into, exchangeable for, or confers a right to acquire a property that is specified foreign property;
· a debt owed by a non-resident, including government and corporate bonds, debentures, mortgages, and notes receivable;
· an interest in a foreign insurance policy; and
· precious metals, gold certificates, and futures contracts held outside Canada.
Properties excluded from the reporting rules are:
· a property used or held exclusively in carrying on an active business;
· a share of the capital stock or indebtedness of a foreign affiliate;
· an interest in a trust described in paragraph (a) or (b) of the definition of "exempt trust" in subsection 233.2(1) of the Act;
· a personal-use property as defined in section 54 of the Act; and
· an interest in, or a right to acquire, any of the above-noted excluded foreign property.
Administrative filing requirements
As mentioned above, the T1135 form is required when the taxpayer is subject to foreign reporting. The reporting is done through 2 methods:
Simplified Reporting Method
If the total cost of all specified foreign property held at any time during the year exceeds $100,000 but was less than $250,000, then the taxpayer selects the type of property held, indicates the top three countries based on cost, and then enters the gross income and gain(loss) from those properties.
Detailed Reporting Method
If the total cost of all specified foreign property held at any time during the year was $250,000 or more, then a more detailed report is required. Seven categories of specified foreign properties are reported, with corresponding tables for each one. The seven categories are:
1. Funds held outside Canada: Cash or equivalents held in foreign accounts
2. Shares of non-resident corporations (other than foreign affiliate): held with foreign brokerage accounts
3. Indebtedness owed by non-residents
4. Interests in non-resident trusts
5. Real property outside Canada: this includes rental, business or personal use
6. Other property outside Canada: Any property not included in the other categories
7. Property held in an account with a Canadian registered securities dealer or a Canadian trust company
Category 2 requires a detailed list of each non-resident corporation held. Category 7 provides some relief for taxpayers where they can simply report the properties on an aggregated country-by-country basis instead of a detailed report.
The deadline to file the T1135 is the same as the tax return for the year [ITA 233.3(3)]. Professional tax software such as DT Max can transmit the T1135 electronically. The penalty for failing to file a return is $25 per day for up to 100 days (minimum $100 and maximum $2,500) [ITA 162(7)].
The costs of the properties declared must be converted to Canadian dollars unless an election under ITA 261(5) is used, which is reserved to corporations only [ITA 261(3)(a)].
Late filing and Voluntary Disclosure Program
If you are late in filing a T1135, you can use the Voluntary Disclosure Program (VDP) of the CRA to get relief from the penalty mentioned above. An RC199 application form would have to be filed. However, the application must include information that relates to a taxation year that is at least one year past the due date for filing [IC00-1R6, par. 37]. In other words, you cannot use the VDP in a case where you are late by a few months. The application is limited to any penalty that could apply to any taxation year that ended within the previous 10 years before the calendar year in which the application is filed [IC00-1R6, par. 17].
American Depositary Receipts (ADRs) and the country code
Although ADRs are listed in the US stock exchange, the taxpayer must indicate the country of origin of these shares. If after an exhaustive search the country cannot be determined, “Other” can be used as the country code.
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