Canadians who hold more than $100,000 of foreign property in their non-registered brokerage accounts received a temporary reprieve from onerous tax reporting in late February. But the change is temporary and doesn’t go far enough.
Advisors will recall that in June 2013, the government continued its fight against international tax evasion by Canadians by following through on its 2013 federal budget promise to revamp and relaunch what it calls a “strengthened” Foreign Income Verification Statement (Form T1135).
“Stronger reporting requirements will provide the Canada Revenue Agency (CRA) with more information to crack down on those who attempt to cheat the system,” said Gail Shea, minister of national revenue, upon introduction of Form T1135.
The penalty for failing to file this form on time is $25 a day to a maximum of $2,500, which can increase if you knowingly, or under circumstances amounting to “gross negligence,” fail to file the form.
The revised T1135, applicable for the current personal taxation season for 2013 tax reporting, requires Canadians who hold “specified foreign property,” at any time in the year, with a cost of more than $100,000, to provide additional information to the CRA. Specified foreign property includes: funds held on deposit outside of Canada, foreign investment real estate and shares and debt of non-resident corporations. It must be noted that securities held in registered accounts such as RRSPs, RRIFs, RESPs and TFSAs are exempt.
New information required includes: the name of the specific foreign financial services institution or other entity holding funds outside Canada; the specific country to which the foreign property relates; the income generated from the foreign property; and the maximum cost amount of those assets during the year.
It was this last requirement that was causing Canadian investors who are subject to the reporting rules to panic as they didn’t know how they could possibly gather the information required on the highest cost amount of every foreign security owned. Many turned to their advisors besieging them with requests to track down such information during the busy RRSP and now tax seasons.
A concerted lobbying effort to get some relief from the onerous, detailed reporting that was to be required for the T1135 reporting this tax season has led to a temporary reprieve for the 2013 taxation year.
Under a transitional rule effective for 2013 only, if a client holds specified foreign property in an account with a Canadian registered securities dealer, he or she must now simply report the combined fair market value of all such property at the end of the taxation year rather than reporting the details of each property. This combined value is to be included in Category 6 of Form T1135, under the heading “Other property outside of Canada.” More details on how to take advantage of this transitional reporting can be found on page 4 of the updated Form T1135 on the CRA’s website. In addition, the CRA announced an extension of the filing deadline for Form T1135 for 2013 to July 31, 2014.
Unfortunately, the rule is temporary and only for 2013, which begs the bigger question: Why do our clients need to report foreign property held in their Canadian brokerage accounts in the first place? After all, the CRA already gets information about foreign income paid to those accounts through the T3 and T5 reporting system and gets information about the disposition of securities through the T5008 reporting. Surely, someone looking to evade taxes on their foreign assets wouldn’t hold them in a Canadian securities account.