Form T1135 was first published in the 1996 federal budget. Canada’s Income Tax Act was also amended, and since 1997, Canadians who own specified foreign property valued more than $100,000 at any time during the year are obligated to complete and file the Form T1135 to CRA.
This filing requirement allows CRA to monitor foreign assets and is designed to combat tax evasion by ensuring overseas income has been reported. Failure to file a return or incomplete disclosure of foreign property may result in penalties and in some cases may result in charges of gross negligence against the taxpayer.
According to the Canadian tax law, new immigrants are not required to declare their foreign assets in the year they land, and they can start declaring that until the following year. The value of foreign assets is calculated based on the Fair Market Value on the day the new immigrant lands, instead of the cost price at the time of purchase. Documents such as the title of the foreign asset and the appraisal of the property at the time of filing must be well preserved for future reference.
Canadian tax policy does not directly tax the foreign asset itself, and there are no direct tax consequences to owning a foreign asset.Tax is only payable when the foreign asset generates income and the sale of the foreign asset generates capital gains.
SPECIFIED FOREIGN PROPERTY
Taxpayers must use Form T1135 to report all foreign assets that can be classified as Specified Foreign Property. Specified foreign property is foreign property that, in addition to meeting the $100,000 gross asset threshold, also falls into one of the following categories:
- Funds outside of Canada
- Funds held outside of Canada include funds held in a deposit account at a foreign bank, and that in the custody of a foreign institutional custodian. Negotiable instruments such as prepaid debit or credit cards, cheques, money orders, etc.
- Shares of foreign institutions (excluding foreign subsidiaries or affiliates)
- Shares of foreign institutions refer to shares in which a person and the related persons hold less than a proportion of the shares of the overseas subsidiary. Shares of foreign affiliates are not required to be reported here and should be reported on the Overseas Business Reporting Form T1134. Shares of foreign affiliates refer that the person holds at least 1% of the shares, plus either he/she alone or together with related parties own 10% or more of the shares of the foreign affiliates.
- Debts owed to you by non-residents
- The commercial paper, commercial bill, unsecured bank debentures, loans, mortgages,etc, which are issued by non-residents, whether held in or outside of the country. Marketable securities include time deposits, government bonds, etc. This does not include debts owed by overseas affiliates.
- Overseas Trusts
- If you make contributions to, or receive distributions or loans from an overseas trust, you have to file Form T1141 or T142, which does not include non-resident trusts of overseas affiliates.
- Overseas Real Estate
- Properties for rent should be included in this category. This does not include properties for private use (mainly for personal family living) or business use (e.g. business premises, warehouses, office buildings, etc.)
- Other foreign assets
- Anything that does not fit into one of the other categories is included in this category. Other foreign assets include: shares of a Canadian company held abroad, foreign assets held through a non-T1135 reporting partner, insurance held abroad, precious metals or bullion (e.g. gold and silver) held abroad; foreign commodity or futures contracts, options or financial derivatives, any rights that give rise to an interest in acquisition of, or possession of foreign assets.
- Foreign property held in a Canadian registered securities account
- U.S. companies’ stocks or other foreign stocks held through a Canadian brokerage account that meet the $100,000 cost threshold must be reported on Form T1135.
FOREIGN PROPERTY THAT DOES NOT NEED TO BE REPORTED ON FORM T1135:
- Foreign assets held in a registered account (such as an RRSP or TFSA)
- Any property used primarily for personal use and enjoyment, such as vehicles, owner-occupied properties and vacation homes, jewelry, artwork, or any other such property
- Assets used solely in the course of business, such as business inventory or equipment and buildings used by a business
- Cash held in Canadian financial institutions in U.S. dollars
WHAT FORMS TO USE
Form T1135 was redesigned in 2015. CRA allows taxpayers to use the newly revised form whether before or after 2014. Taxpayers may also use this new form to amend previously filed Forms T1135. For tax years 2015 and later, taxpayers may use the simplified return form to file with CRA if the total cost of the taxpayer’s designated foreign assets for the year exceeds $100,000 but is less than $250,000. The current detailed return form is available to taxpayers who own specified foreign property with a total cost of $250,000 or more at any time during the year.
DEADLINE FOR FILING FORM T1135
The deadline for filing T1135 is the same day as your income tax return. So if you are gonna file an individual return on April 30, you must file T1135 by this date. If you are filing a self-employment return due June 15, you must file this form by this date.
PENALTIES FOR MISREPRESENTATION AND OMISSION
Failure to file a T1135 may result in severe penalties for the taxpayer. The penalty is a minimum of $25 per day and the penalty period is 100 days. That is, the minimum penalty is $100 and the maximum penalty is $2,500. This penalty may be imposed even if the taxpayer’s failure to file is not intentional.
If a taxpayer is grossly negligent in filing Form T1135, the penalty increases to $500 per month for up to 24 months. Gross negligence means that the taxpayer knowingly failed to file Form T1135 or acted in a manner that indicates that he or she knowingly failed to file Form T1135.
Even if a taxpayer files a Form T1135, if he or she makes a false statement, or fails to declare all designated foreign property, it may result in a penalty. When the taxpayer’s conduct constitutes gross negligence, the penalty is $24,000 or 5% of the cost of the designated foreign property.
VOLUNTARY DISCLOSURE PROGRAM (VDP)
For taxpayers who have not met their Form T1135 filing obligations, there is an option to go for a Voluntary Disclosure Program application.
If CRA accepts the voluntary disclosure application, the taxpayer will not be charged with a penalty or prosecuted for failure to file, omission of information, or making a false statement on Form T1135. However, the taxpayer will still be required to pay accrued interest on the amount owed, but will be granted partial interest relief.
The Voluntary Disclosure Program is best suited to handle the most recent 10-year T1135 filing period. If it is beyond the 10-year statute of limitation, the best solution is to discuss with a Canadian tax lawyer. All back filings require relevant evidence to explain to CRA.
ACTIONS OF THE CANADIAN GOVERNMENT
Since September 2018, the CRS tax information exchange between Canada and China has been officially opened. Once the Canadian tax authorities verify the immigrants’ assets in China, the Chinese tax authorities are obliged to cooperate. In 2020, CRA also announced that they will collect information on Canadians’ real estate in the U.S. under the U.S.-Canada Tax Treaty, and check for unreported overseas properties, rental income, and proceeds from property sales. It is expected that the Canadian government will be more and more strict in checking overseas funds. Therefore, taxpayers must take precautions and think long term about that.
TRUTHFUL DECLARATION
The immediate consequence of not reporting or under-reporting your foreign assets is that you will not be able to justify the source of your undeclared assets when you transfer them to Canada in the future, and they will be recognized as income by the tax authorities.
Does inflating the amount of overseas assets allow you to transfer the inflated assets into Canada tax-free in the future? If the amount of overseas assets is so large and they do not produce reasonable income for a number of years, there is a serious mismatch between your assets and the income they produce, which will instead raise concerns from CRA.
Not truthfully declaring your overseas assets while not having a large enough income in Canada will raise suspicion from the Canadian tax authorities when you purchase a home or have savings in Canada. Even if the tax department does not check immediately, it can be traced later.
Therefore, it is best to declare your assets truthfully.
If you have any questions about declaring your foreign assets, please feel free to call us at 604-232-1070 to schedule a consultation with our corporation.