You may have heard of the T1135 form, also known as a Foreign Income Verification Statement. You may have also heard that there have been changes made by Canada Revenue Agency (“CRA”) to the T1135 effective for taxation years ending after June 30, 2013. The purpose of this article is to summarize and describe what a T1135 statement is, who is responsible for filing one, and what must be reported; it will also cover how the new T1135 is different from the former T1135, suggest why this is happening, and describe what solutions are available for those who have not been filing their T1135s.
Purpose of T1135
The T1135 form is a Foreign Income Verification Statement that some taxpayers must complete and submit along with their personal returns to the CRA every taxation year. Its purpose is to alert the CRA to the offshore property a Canadian taxpayer may own, increasing transparency to the CRA from the taxpayer.
Who needs to File T1135s
All Canadian resident taxpayers, including non-resident trusts deemed resident in Canada due to Foreign Accrual Property Income (“FAPI”) rules, must file a T1135 if the total cost amount of all “Specified Foreign Property” owned by the taxpayer at any time in that year exceeded $100,000 CAD. There are certain exemptions to this filing requirement, including mutual fund corporations or a person whose entire taxable income is exempt from Part I income tax, but most taxpayers who cross the $100,000 threshold will be responsible for filing a T1135. Partnerships that hold Specified Foreign Property in excess of $100,000 must also file a T1135 if the non-resident partners’ share of income/loss is less than 90% during the reporting period.
The $100,000 threshold is not based on fair market value (which is how much the asset would sell for in the open market). It is based on the Adjusted Cost Base (“ACB”), which is the cost of the assets. Furthermore, the $100,000 is calculated as the sum of all Specified Foreign Property owned by the taxpayer. This means that if a taxpayer owns foreign property across multiple countries and the total cost of all property exceeds $100,000, he or she must file a T1135. It should also be noted that once the $100,000 threshold has been passed during a year, taxpayers cannot dispose of a foreign asset to bring the cumulative cost of the assets back under $100,000; as soon as the threshold is reached, a T1135 must be filed. That said, if the next year the cost is under $100,000 then a T1135 is unnecessary. In addition, where a taxpayer receives a T3 or T5 slip relating to the Specified Foreign Property, no additional disclosure is required – however, the cost of the Specified Foreign Property still counts towards the $100,000 threshold.
What must be reported on T1135s
What qualifies as Specified Foreign Property is described in a list in the Income Tax Act under subsection 233.3(1). The most common assets that qualify include bank accounts held abroad, shares of non-resident (i.e. foreign) corporations, interests in a non-resident trust, land or buildings held abroad, shares of Canadian-resident corporations held by the taxpayer (or for the taxpayer) abroad, an interest in a foreign insurance policy, precious metals and gold certificates held abroad, futures contracts held abroad, or an interest in a partnership that holds Specified Foreign Property.
Specified Foreign Property does not include property held or used exclusively in carrying on an active business, shares of a foreign affiliate, an interest in the indebtedness of a foreign affiliate, an interest in an exempt trust, “personal-use” property, or an interest in, or a right to acquire, any of the aforementioned excluded foreign property.
Personal-use property is defined in section 54 of the Income Tax Act and includes vacation property that is used primarily as a personal residence, and “listed personal property” such as works of art, jewelry, rare folios, rare manuscripts, rare books, stamps, and coins.
Changes from old T1135
The format of a T1135 form used to be relatively simple and straightforward to complete. It did not require disclosure of very specific information; in fact, when requesting the location of the foreign property the options provided consisted of the United States, the U.K., Europe (other than U.K.), Southeast Asia, the Caribbean, or Other. Conversely, the new T1135s requires detailed information such as:
- Whether the filing is an amended return;
- The specific country where property is located
- Maximum cost of each property during the year, and the cost at year end;
- Gain/loss on disposition of property;
- The name of the bank holding funds;
- Income or losses relating to the Specified Foreign Property;
- The name of the corporation that issued the shares;
- The name of any foreign trust the taxpayer has an interest in; and
- Descriptions of all property held abroad.
Suffice to say the T1135s have become much more demanding in the amount of information disclosed to CRA.
Penalty for not filing
There are substantial penalties for failing to complete and file T1135 forms if required. If CRA discovers that a taxpayer has not complied with their T1135 filing requirements, the penalties levied on the taxpayer may include:
- Failure to Comply (Income Tax Act s.162(7))
- Failure to furnish foreign-based information (Income Tax Act s.162(10)(a) and (b))
- Additional penalties after 24 months (Income Tax Act s.162(10.1))
- Gross negligence or false statements and omissions (Income Tax Act s.163(2.4))
A simple (but heavy) late-filing penalty (i.e. failure to comply) is $25 per day up to a maximum of $2,500 per year.
The “failure to furnish foreign-based information” penalty is levied when the failure to file is done knowingly or under circumstances amounting to gross negligence, and is a penalty of $500 per month up to a maximum of $12,000 less any penalties already levied.
Similarly, a “failure to furnish foreign-based information” penalty is issued where a demand to file a return is issued and the person knowingly or under circumstances amounting to gross negligence fails to file, and is a penalty of $1,000 per month up to a maximum of $24,000 less any penalties already levied.
After 24 months the penalty for non-filers becomes 5% of whichever of the following events led to a requirement to file: cost of the foreign property, fair market value of the property transferred/loaned to the trust, cost of shares, and indebtedness of the foreign affiliate.
Finally, gross negligence penalties or a penalty for false statements and omissions can be applied and are the greater of $24,000 or 5% of the event leading to a requirement to file, taken from the list in the preceding paragraph.
CRA crackdown on foreign income
The reason that CRA altered the T1135 form in such a dramatic fashion is that CRA is becoming more aggressive in chasing the billions of offshore dollars that are escaping taxation annually, and CRA is introducing better tools to chase those who have (knowingly or unknowingly) not complied with filing requirements.
This shift in CRA requirements comes at a time when international banks are under increasing pressure from countries such as the US and Germany to ensure their clientele are in full compliance with their national tax authorities. For instance, Swiss banks Credit Suisse and UBS, along with Israeli Bank Leumi have all been recent targets of tax authority actions to reveal tax evaders. It is only a matter of time before all banks require their clients to demonstrate that they are compliant with their national tax authority.
The new T1135 form follows the CRA’s new Form T1134 “Information Return Relating to Controlled and Not-Controlled Foreign Affiliates”. The revised Form T1134 is required for tax years after 2010, and was also altered to require more detailed information on the reporting entity, the form’s certifier, and the reporting entity’s organizational structure.
CRA sent out a letter in December 2014 to certain taxpayers to remind them who needs to file a T1135 form, detailing the potential penalties and prosecution in the process. This letter also contained information about the potential availability of protection from penalties and prosecution through the Voluntary Disclosures Program, discussed below.
Voluntary Disclosure Availability
For taxpayers who have not been meeting their reporting requirements, CRA had provided the Voluntary Disclosures Program. The Voluntary Disclosures Program allows Canadian taxpayers that proactively come forward with their unreported or unfiled foreign income and assets to avoid prosecution for tax evasion and receive partial interest relief along with the waiver of all monetary penalties. One of the key requirements of the Voluntary Disclosures Program is that it must be “voluntary”; if CRA contacts a non-compliant individual first, they can no longer utilize the Voluntary Disclosures Program. To be protected by the Voluntary Disclosures Program, a taxpayer must make a declaration that they are coming forth with a disclosure before CRA contact occurs. CRA “contact” encompasses any enforcement action set to be conducted by CRA, or enforcement action conducted by CRA on a person associated with or related to the taxpayer where the undisclosed information was likely to have been uncovered.
CRA has stated that the December 2014 letter mentioned in the prior section will not preclude a taxpayer from entering the voluntary disclosures program.
Canadian Tax Lawyer Assistance for Tax Disputes
If you aren’t certain whether you are required to report some income or property you own abroad, or if you have been contacted by the Canada Revenue Agency for a review or audit, or are considering engaging in a tax dispute with the Canada Revenue Agency, get in touch with our experienced Canadian Income Tax Litigators. Effective planning and strategy is necessary at all stages of the tax dispute process. Our Canadian tax lawyers can give you the counsel and representation that you need to be successful in your dispute with the Canadian Revenue Agency at each stage of the process.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."