Published: May 31, 2021
Last Updated: October 21, 2022
Specified foreign property – tax guidance from a Canadian tax lawyer on foreign reporting requirements
A Canadian taxpayer has to report the income earned from both Canadian and foreign sources. Therefore, it is important to be aware of the rules with respect to declaring foreign property on your tax return. If the total cost of specified foreign properties that you held exceeds $100,000 at any time during the taxation year, you are required to file the T1135 form – Foreign Income Verification Statement. The due date for Form T1135 is the same as the deadline for your personal or corporation income tax return. Failure to file on time can lead to significant tax penalties.
Who needs to file T1135
This reporting requirement applies to Canadian resident individuals, corporations, trusts as well as certain partnerships. However, individuals are not required to file form T1135 for the year in which they become a Canadian resident.
What is specified foreign property
Specified foreign property typically includes:
- amounts in foreign bank accounts, but not US funds in a Canadian financial institution,
- shares in foreign companies, even if held in a Canadian brokerage,
- shares of corporation residents in Canada held outside Canada (e.g., in a brokerage account in another country),
- interests in non-resident trusts that was acquired for consideration,
- bonds or debentures issued by foreign governments or foreign countries,
- life insurance policies issued by a foreign issuer – CRA’s “Questions and Answers” indicates that the “adjusted cost basis” of an interest in a life insurance policy as defined in subsection 148(9) of the Income Tax Act can be considered as a reasonable approximation of the cost amount of the property for the purpose of Form T1135,
- a property that is convertible into, exchangeable for, or confers a right to acquire a property that is specified foreign property (e.g., a call optionwhich has been purchased),
- interests or units in offshore mutual funds,
- funds or intangible property such as cryptocurrency, and
- real estate situated outside Canada (unless mainly held for personal use and enjoyment).
Specified foreign property does not include:
- foreign property held in registered accounts such as RRSPs, RRIFs, RESTPs, RDSPs, locked-in registered plans and TFSAs,
- units of Canadian mutual fund trusts or mutual fund corporations that invest in foreign securities or are held in a foreign currency,
- personal-use property such as vacation homes, vehicles, jewellery, artwork of any other such property, and
- property used or held exclusively in carrying on an active business such as a business inventory, equipment or building used in a business.
Note that even if some or all of the property was sold before the end of the taxation year, the T1135 should still be filed as long as the total cost of all specified foreign properties exceeds $100,000 at any time during the year.
What information should be reported on form T1135
The T1135 form requirement started from the taxation year of 1997 and was revised for the 2014 taxation year to streamline foreign asset reporting for certain taxpayers.
- Simplified reporting method
For 2015 and later taxation years, if the total cost of specified foreign assets is more than $100,000 but less than $250,000 throughout the year, a taxpayer can report the assets to CRA under a new simplified foreign asset reporting method under Part A of the T1135. A taxpayer must indicate:
- the type of property,
- the top 3 countries based on the maximum cost amount of specified foreign property held during the year,
- the total income throughout the year from all specified foreign property, and
- the amount of gain or loss from the disposition of all specified foreign property.
- Detailed reporting method
If the total cost of all specified foreign assets is more than $250,000 at any time of the year, a taxpayer needs to complete Part B of the T1135 form using the detailed reporting method. The form is divided into seven categories that correspond to different types of specified foreign property.
Pro tax tips – Consequences of failure to file on time
If you fail to file the T1135 form on time, you may face a penalty of $25 per day subject to a minimum penalty of $100 and a maximum of $2,500. There may be further penalties if the failure to file or errors were made knowingly or resulted from gross negligence. Furthermore, a three-year extension to the normal reassessment period may apply to your entire tax return which extends the statutory barred period of your normal assessment or reassessment from 3 years to 6 years. To make matters worse, the review from the CRA is not restricted to just your foreign property.
If you failed to submit the T1135 form on time, you can possibly submit a voluntary disclosure application to avoid severe penalties. To qualify for the voluntary disclosure program, you must meet certain criteria and it is highly recommended that you seek professional advice from an expert Canadian tax lawyer. Contact our office to speak with an experienced Canadian tax lawyer for guidance.
Disclaimer:
"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."
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Frequently Asked Questions
According to the Canada Revenue Agency (CRA), specified foreign property includes bank accounts held abroad, debt securities and shares of foreign corporations and debt owed by a non-resident, including governments, real estate, an interest in a partnership that holds a specified foreign property unless the partnership is required to file a T1135, a life insurance policy issued by a foreign issuer, and other tangible and intangible properties located outside Canada.
Individuals can file Form T1135 electronically using tax software starting with the 2015 tax year. For years before 2015, the form has to be paper filed. Corporations can EFILE Form T1135 electronically for the 2014 and later tax years. However, for the years before 2014, the form must be paper filed. You can also view and download the T1135 form through the Canada Revenue Agency’s website under Forms and Publications.
Whether an individual or corporation can file Form T1135 electronically using tax software depends on the taxation year in question. For the 2015 tax year and onwards, individuals can file Form T1135 electronically through EFILE or NETFILE. However, for the years before 2015, the form must be paper filed. Corporations can file Form T1135 electronically through EFILE for 2014 tax year and subsequent tax years. However, for the years before 2014, the form must be paper filed.
