Introduction – CRA Offshore Assets Form T1135
Foreign Investment Verification, or T1135, is a form that must be filed with Canada Revenue Agency (CRA) by anyone who, at any time during the year, owns foreign property valued more than $100,000 in Canadian currency. Failure to file or incomplete disclosure of foreign property may result in monetary penalties and in certain instances may carry gross negligence charges against the taxpayer.
It is important to note that the $100,000 threshold is always assessed in Canadian currency. For example, $98,000 of foreign property in U.S. dollars is likely to meet the $100,000 threshold once converted to Canadian dollars. In contrast, $88,000 of foreign property in Australian dollars may not meet the $100,000 threshold.
The $100,000 threshold is based on the adjusted cost base of the foreign property, and not the fair market value of the assets. However, if the foreign property was a gift or inheritance, the cost is the fair market value of the asset at the point in time when the taxpayer received the gift or inheritance.
What has to be Reported on Form T1135: Specified Foreign Property (SFP)
Taxpayers are required to declare, using a T1135 form, all their foreign property that can be classified as Specified Foreign Property. Specified foreign property refers to foreign property that in addition to meeting the $100,000 cost threshold falls into one of CRA’s specified categories, as follows:
- - Real property that is located outside of Canada that meets the $100,000 cost threshold must generally be reported. (There is an exception, discussed below, for personal use of property.) For example, ownership of a condominium, house or even vacant land outside of Canada requires a taxpayer to declare this property in a T1135 form. In addition to tangible property, such as real estate, a taxpayer must also report intangible property that is held outside of Canada.
- - Intangible property such as money in foreign bank accounts, shares, stocks, bonds and even copyrights or patents held outside of Canada must be declared in a T1135 Form.
- - Specified Foreign Property may also include life insurance policies issued by a foreign insurer.
- - Precious metals, gold certificates and futures contracts held outside of Canada are also considered foreign property that must be reported.
Depreciable Specified Foreign Property
Where the Specified Foreign Property is depreciable property, the cost amount is the Undepreciated Capital Cost (UCC) of the property. Depreciation, as an accounting concept may have two distinct meanings. First, depreciation refers to the value of the asset that has been used up over time. For example, a manufacturer may write off the cost of a new piece of equipment over time, or distribute the cost of the asset over the equipment’s lifetime. Buildings, equipment, machinery and motor vehicles are examples of assets that may be classified as depreciable property under Income Tax Act (ITA). For a full list of most common class of depreciable property and the corresponding rate of depreciation, see the CRA website.
Real property refers to land and all things attached to it. In every day usage and as pertaining to offshore assets, real property includes real estate assets such as single unit housing, condominiums, or shopping plazas. A trailer that is permanently attached to land may also be considered real property. If you are unsure if your real estate in a foreign country must be reported, see the Canada Revenue Agency (CRA) real property questions.
Canadian Companies Traded on Foreign Stock Exchanges
There are many Canadian companies traded on foreign stock exchanges. A taxpayer is not required to declare this type of investment on a T1135 form. Generally, the currency of the holding or the stock exchange where the shares of the Canadian Corporation are bought or sold is not determinative. The shares of a Canadian corporation are not Specific Foreign Property. An investment held in a U.S. brokerage account is not necessarily a foreign investment. For instance, holding Barrick Gold or Thomson Reuters in a U.S. brokerage account that is traded on the Toronto Stock Exchange (TSX), and has dividends that are paid in US dollars, are considered assets of a Canadian Corporation. In this example, the Barrick Gold or Thomson Reuters shares are not Specified Foreign Property.
However, shares of a Canadian corporation which are held in a brokerage account outside of Canada are considered specified foreign property.
Foreign Companies on Canadian Stock Exchanges
There are foreign companies listed on Canadian stock exchanges. TMX.com has a downloadable Excel workbook which includes 2 worksheets with lists of US Companies that are listed on the TSX and TSXV (TSX Venture Exchange).
American Depository Receipts (ADRs)
American Depository Receipts, also referred to as ADRs, trade on the U.S. stock exchanges, but represent shares of a non-U.S. corporation, and must be reported. One issue that may arise is which country code to use in order to meet the CRA reporting requirement.
ADRs should be reported as a security of the underlying non-resident corporation in either category 2 or, if applicable, category 7 of the T1135 form. Category 2 refers to the shares of a non-resident corporation and does not include shares from foreign affiliates of a resident company. ADRs that are held in an account with a Canadian registered securities dealer or a Canadian trust company may be included in Category 7 of the T1135 form.
Where the residence of the underlying non-resident corporation cannot be determined after exhausting all reasonable efforts, it is acceptable to use "Other" as the country code. The country of the underlying security issuer can often be found in J.P. Morgan's ADR website.
U.S. or other Foreign Shares in a Canadian Brokerage Account
Shares are intangible foreign property and they may qualify as Specified Foreign Property. Shares of a U.S. corporation or other foreign shares that are held through a Canadian brokerage account that meet the $100,000 cost threshold in Canadian Currency must be declared in a T1135 form.
Foreign-based Trust or Corporation
Foreign based trusts or corporations must also be declared in a taxpayer’s annual filing. However, it is important to note that a taxpayer is not required to declare investments in a Canadian mutual fund.
Investments in a non-Canadian mutual fund or exchange traded fund that meets the $100,000 is a Specified Foreign Property that must be declared in a T1135 form.
Foreign Property that does not have to be declared on Form T1135
Even if the foreign property meets the $100,000 cost threshold, the CRA does not necessarily require the taxpayer to declare all of his or her foreign assets. Foreign property that is used primarily for personal use does not have to be declared. Primary use for personal purposes means that the particular asset is used, at least 50% of the time or more, for a personal and non-commercial purpose.
For example, whether a Canadian taxpayer has to declare the cost of a condominium in Florida, with a cost base of at least $100,000 in Canadian currency depends on how the taxpayer uses this property. If the taxpayer uses the condominium exclusively for his or her vacations to Florida, the cost of the condominium does not have to be declared in a T1135.
However, if the taxpayer rents the condominium for at least the majority of, if not the entire year, then the CRA requires the taxpayer to declare the cost of this property in a T1135 form.
It is important to note that merely renting out a real estate property does not automatically trigger reporting requirements. For instance, if the taxpayer rents out the Florida condominium for part of the year, and he or she does not have a reasonable expectation of profit from the rent collected, and in addition, the individual is merely covering part of the condominium expenses, then, the condominium is a personal use property. The taxpayer is not required to disclose the cost of the condominium.
A second category of offshore property that a taxpayer does not have to declare in a T1135 form is property that is used for commercial purposes, and is used to carry out business. For example, a taxpayer who is in the business of renting out apartments outside of Canada is not required to report the cost of this property in a T1135 form.
Reporting Requirements and the 2015 Revisions to Form T1135
CRA form T1135 was redesigned in 2015. Whether filing for years prior to or after 2014, the CRA allows a taxpayer to use the newly revised version of this form. A taxpayer may also use this newly updated form for amending a previously filed T1135 form.
The revised T1135 reporting requirements differ from the old version of the form. The current form has a two-tier reporting structure: a simplified reporting as outlined in Part A and a detailed reporting structure found in Part B of the T1135 form. Whether a taxpayer declares using Part A or Part B of T1135 depends on the total adjusted cost base of the taxpayer’s Specified Foreign Property.
Part A applies to taxpayers who hold foreign property with a total adjusted cost base of more than $100,000 but less than $250,000 in Canadian currency during the year. The reporting requirements apply even if the cost of taxpayer’s foreign property falls below the $100,000 threshold by the end of the year. A simplified reporting under Part A merely requires the taxpayer to tick-off the box for each type of property held during the year. A taxpayer is not required, although he or she can, provide a detailed description of his or her foreign property.
Part B applies to taxpayers whose total adjusted cost base of their foreign property exceeds $250,000 at any point during the year. If at any time during the year the cost of a taxpayer’s foreign property reaches $250,000 in Canadian currency, Part B of the T1135 form must be used, even if the cost has dropped below this threshold by the end of the year. Declaring under Part B may be onerous, requiring the taxpayer to provide a detailed description of all his or her foreign property.
Some taxpayers own offshore assets in more than three countries, and Part A requires the taxpayer to report the “top three countries” where the taxpayer owns foreign property. In order to determine the “top three” countries, a taxpayer needs to total month end cost amounts of his or her foreign property in each country. The taxpayer must then report only the three countries that correspond with the top three highest month-end cost amounts.
Filing Deadline for T1135 Form
For individuals, corporations and trusts, the T1135 form is due on the same date as the income tax return.
Individuals and corporations can file form T1135 electronically for the 2014 and later tax years. For years before 2014, the form has to be paper filed.
Whether filing for years prior to or after 2014, the CRA allows the taxpayer to use the newly revised Form T1135. The taxpayer may also use this newly revised form for amending a previously filed T1135 form.
Penalties for Failure to File a T1135 Form
Failure to file a T1135 can result in strict penalties being levied against the taxpayer. A strict penalty means that a taxpayer is automatically penalized even if he or she did not know of his or her obligation to file a T1135. A taxpayer who fails to file a T1135 form by the deadline will be penalized. At a minimum, the penalty is $25 per day for up to 100 days. The minimum penalty for failure to file is $100, and the maximum penalty is $2,500. This penalty is likely to be applied even if the taxpayer’s failure to file was not intentional.
When a taxpayer has committed gross negligence in filing his T1135 Form, the penalties are increased to $500 per month for a maximum of 24 months. Committing gross negligence means that the taxpayer has, with full knowledge, failed to file a T1135 Form, or his/her conduct gives the appearance that s/he must have knowingly failed to disclose and file a T1135 form.
Once the CRA contacts a taxpayer by issuing a demand to file a return, and the taxpayer’s conduct amounts to gross negligence, the penalties are further increased to $1,000 per month for up to 24 months. After the 24-month period, for every year that a T1135 is not filed, the taxpayer is penalized 5% of the highest cost of the undeclared Specified Foreign Property (SFP) in the previous tax year or 5% of the highest cost of the Specified Foreign Property for every year that the T1135 is not filed.
In Douglas v Canada 2012, TCC 73, the taxpayer Mr. Douglas was penalized for not filing a T1135 on time. Mr. Douglas had taken all reasonable steps in filing his income tax every year. However, he had presumed that because his overseas assets had no tax payable, he had no obligation to file a T1135 form on time. The Tax Court of Canada agreed with Mr. Douglas, finding it unreasonable for fines to be levied for failure to report when there was no tax payable on the Specified Foreign Property.
In a more recent case, Biswal v Canada 2017, FC 529, the facts are very similar to that of the s case. In Biswal, the Federal Court again addressed the issue of strict penalty for a late filing of T1135. Ms. Biswal advanced the argument that because she was new to Canada and a pensioner, the imposed financial penalty was unreasonable and asked the court for relief. Speaking through her son who acted as a translator, Ms. Biswal made reference to the Douglas case, pointing out the similarity of her situation to that of Mr. Douglas.
In this more recent case, the Federal Court did not lift the monetary penalties imposed on Ms. Biswal. The Judge rightly pointed out that the Federal Court does not have jurisdiction to vacate the penalty imposed. Ms. Biswal’s request for penalty relief was sent for a second review to CRA.
These cases demonstrate that it is unlikely that a taxpayer can gain relief from the monetary penalty imposed as a result of late filing of T1135 form by simply filing a Tax Payer Relief Application with the CRA. These cases suggest that the remedy of relief from penalty may be available through an appeal with Tax Court of Canada alone. The outcome of such an appeal in terms of the remedy sought, however, is uncertain and will likely turn on the facts of the case.
Penalties for False Statements and Omissions from T1135
Even if a taxpayer files a T1135 form, making false statements, or failing to declare all the Specified Foreign Property, may result in penalties being levied against the taxpayer. The penalty is imposed when the taxpayer’s conduct amounts to gross negligence andit is the greater of $24,000 or 5% of the cost of the Specified Foreign Property.
Voluntary Disclosure Program (VDP)
The Voluntary Disclosure Program may be an option for taxpayers who have not met their T1135 form filing obligations.
If the CRA accepts a Voluntary Disclosure Application, the taxpayer will not be charged tax penalties or prosecuted for failure to file, omitting information in a T1135 form, or making false statements. However, the taxpayer will remain liable for the accrued interest on the amount owing, but may be granted partial interest relief.
The Voluntary Disclosure Program is most suitable for addressing the T1135 Form filings in the most recent 10-year filing periods. There are, however, possible solutions to the addressing this 10 year limitation period that are best discussed with a Canadian tax lawyer. Proposed changes to the voluntary disclosure program released in June 2017, if implemented, may have the effect of limiting the availability of the VDP in some circumstances.
The most important tip is that you are always responsible for the accuracy of any T1135 form that you file, even when the work was done by a professional accountant or another tax preparation service. When the form is not filled out by you, best practice is to review the form prior to it submission. If you are filing yourself, it is best to use the fillable T1135 form from the Canada Revenue Agency’s website.
Tracking the Cost of Your Specified Foreign Property in Canadian Currency
In order to know whether the cost of your foreign investments exceeds $100,000 in Canadian currency at any time in the year, you'll have to keep good records.
To ensure accuracy and efficiency in tracking the cost of your foreign investments in Canadian currency, it is best to create a worksheet (electronic or on paper) where you can see the total cost amount at any time during the year. It is possible for the fair market value to be under $100,000 and the cost over $100,000 in Canadian currency.
If you use a software program such as Quicken to track your stocks, investments held in a U.S account are generally shown in U.S. dollars, but you can produce a report that will show the holdings in Canadian currency. Make sure you are using Canadian currency for the report, and that "Transaction Exchange Rate" is ticked, in order to get the correct cost in Canadian dollars. This report should be done each time foreign purchases are made in a non-registered account to check the total cost. If you are not using a software, you must convert the cost to Canadian dollar using the U.S. exchange rate from the Bank of Canada or Pacific Exchange Rate service.
For foreign securities held with a securities dealer, you need to know the maximum market value in Canadian dollar during the year once you are over the $100,000 threshold. The maximum market value during a taxation year is based on the maximum month end market value.
You can calculate the highest market value using the average exchange rate for the year. However, the year-end exchange rate should be used for the year-end market value. Using a worksheet to track the month-end market value in U.S. currency during the year is an easy way to keep track of the cost of your Specified Foreign Property. You can get the average and year-end exchange rate for conversion from either the Bank of Canada or the Pacific Exchange Rate Service.
You can also use the month-end currency exchange rate to calculate the highest market value during the year in Canadian currency.
Filling out a T1135 form may not be an easy task for taxpayers with different types of Specified Foreign Property. This is especially the case when the cost of this type of property fluctuates during a given taxation year. It is best to consult with a Canadian tax lawyer to ensure you have met your obligations in declaring your Specified Foreign Property when you file your tax returns.
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"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."