As the Canada revenue agency (CRA) steps up its efforts to ensure that Canadians report their foreign property holdings as well as income from foreign sources, financial advisors have a responsibility to counsel their clients about complying with their reporting obligations.
Canadians who own specified foreign property – such as stocks, bonds, real estate, precious metals, interest in insurance policies, corporations, trusts or any other tangible assets – with a book value exceeding $100,000 at any point during a taxation year are required to file Form T1135: Foreign Income Verification Statement when filing their personal income tax return.
Derryn Burtenshaw, tax accountant with Harvey Cantor Professional Corp. in Markham, Ont., says that although the T1135 is a verification statement – and not a formal tax return – taxpayers who fail to file one may be subject to penalties levied by the CRA.
Alim Dhanji, senior financial planner and senior insurance advisor with Assante Financial Management Ltd. in Vancouver, notes that even if your clients are entitled to a refund on their tax return – in which case they may choose not to file their personal tax return before the April 30 deadline – they “still must file the T1135 by April 30.”
If a T1135 is not filed on time, your client may face a minimum penalty of $100 and $25 a day thereafter for a maximum of 100 days, up to $2,500. When the failure to file is done knowingly or due to gross negligence, the penalty is $500 a month for up to 24 months, up to a maximum of $12,000.
Furthermore, if your client knowingly fails to comply after the CRA demands a T1135 be filed or the client is grossly negligent, the penalty is $1,000 a month for up to 24 months, up to a maximum of $24,000.
According to the CRA, penalties amounting to $26.3 million were assessed collectively on 10,040 taxpayers in fiscal 2017-18 for failure to file Form T1135.
Since 2016, the CRA has increased its efforts to analyze Canada’s tax gap – that is, tax revenue lost through various sources as a result of non-compliance with reporting requirements. This past July, the tax agency issued its International Tax Gap and Compliance Results for the Federal Personal Income Tax System report, which estimates that in 2013, Canadians collectively were hiding between $75.9 billion and $240 billion in wealth offshore. This translates into a federal tax gap of $800 million-$3 billion.
The CRA aims to close this gap by employing several measures to track offshore assets, including bilateral and multilateral information-sharing with some 100 countries as part of the Organization for Economic Co-operation and Development’s common reporting standards initiative; implementation of an “offshore tax informant” program; tapping into networks used by high net-worth individuals through the CRA’s “related party” initiative; analyzing information on electronic funds transfers through financial services institutions; and using the courts to force Canadian financial services institutions to disclose the names of accountholders who hold foreign assets or are involved in foreign financial transactions through what the CRA calls its “information requirements regarding unnamed persons” initiative.
A growing number of Canadians have been complying with their T1135 reporting obligations. The tax gap study found that the number of Canadians filing a T1135 increased sharply to 268,910 in 2014 from 81,300 in 2004, with individuals accounting for 78% of the filers and the rest comprising corporations, trusts and partnerships. Although individuals accounted for a greater proportion of T1135 filings, their share of the total value of foreign assets reported was only 37%.
In 2014, T1135 filers collectively reported about $429 billion in assets, $9 billion in foreign income and $13.2 billion in capital gains. The top countries in which assets were held and foreign income reported were the U.S., China and the U.K.
Based on information acquired through the CRA’s enhanced compliance regime, the agency so far has completed international audits on 370 individuals, 200 corporations and a small number of trusts, which uncovered almost $1 billion in unreported income. Additional taxes amounting to $284 million were identified, of which 23% was attributable to individuals and 77% to corporations and trusts linked to those individuals.
Burtenshaw suggests that some clients “are confused” and may not file a T1135 because they believe that the brokerage houses through which foreign assets are held are responsible for the clients’ related CRA filings.
However, the CRA found that taxpayers have difficulty confirming all the details of their assets held through Canadian brokeage houses. To make filing T1135s easier, as of this year, assets held through a registered Canadian securities dealer can be reported in aggregate, as compared with detailed reporting for all other property. The CRA also introduced simplified reporting for taxpayers who hold $100,000-$250,000 in foreign property.
With the CRA beefing up its international audit staff and enhancing its compliance regime, you must make sure your clients are aware of their T1135 obligations. Dhanji says he encourages taxpayers who have failed to file a T1135 in the past to do so under the CRA’s voluntary disclosure program (VDP). (See story on page 19.)
The VDP allows taxpayers to correct inaccurate or incomplete information on a previously filed tax return or disclose omitted information that should have been filed. Taxpayers who use this program still must pay outstanding taxes plus interest, but may be exempt from some penalties.