This article appears in the March 2023 issue of Investment Executive. Subscribe to the print edition, read the digital edition or read the articles online.
Cryptocurrency’s popularity and the declining value of the Canadian dollar could force more taxpayers to acquaint themselves with the Canada Revenue Agency’s (CRA) foreign property declaration rules.
Since the late 1990s, the CRA has required Canadian residents who own “specified foreign property” with a total cost of more than $100,000 at some point in the tax year to file Form T1135 — also known as the Foreign Income Verification Statement — by the same deadline as their regular tax return.
According to CRA data, the number of taxpayers filing a T1135 doubled between 2011 and 2015 — the most recent year available — to about 260,000 from 130,000 taxpayers. That figure probably has continued to grow, said John Oakey, national director of tax with accounting firm Baker Tilly Canada in Dartmouth, N.S.
Oakey noted that the $100,000 threshold for reporting remains unchanged since the form’s introduction. But he doesn’t expect the amount to rise to account for inflation or the Canadian dollar’s recent slide against its U.S. counterpart.
“It’s a lot easier to trigger the requirement these days, but I’d be shocked if [the Department of] Finance ever increased the threshold, since it’s forcing more compliance, which is really what they want,” Oakey said.
Since 2015, taxpayers with total foreign assets that cost between $100,000 and $250,000 have been able to use a simplified T1135 form, which allows taxpayers to declare assets in aggregate and check boxes to identify the types of property held, along with the top three countries in which they are located. These forms must also disclose the total income and any capital gains or losses realized on foreign property during the year.
The more detailed reporting method, which applies to taxpayers with assets that cost more than $250,000, requires entries for each foreign asset, including the location, maximum cost amount during the year, year-end cost and any associated income or capital gains.
Foreign property held in registered accounts such as RRSPs, RRIFs, locked-in retirement accounts and TFSAs do not count toward the $100,000 threshold; nor do assets held in foreign registered pension plans, such as a U.S. 401(k).
In addition, real estate held abroad for personal use — such as a vacation home — need not be declared. But David Rotfleisch, tax lawyer with Rotfleisch & Samulovitch Professional Corp., warns the same property could become reportable if some or all of it is rented out during the year, or while not in use by the Canadian-resident owner.
Taxpayers who do not seek advice regarding their foreign property are most likely to run afoul of the rules, Rotfleisch added. “If you have 10 different foreign assets, each with a cost of $10,000, you are required to complete the form,” he said. “And you have to list all foreign assets, regardless of how low the cost or value is.”
Phil Hogan, partner with Hutcheson & Co. in Victoria, said that new Canadian tax residents get a break from filing a T1135 for their first tax year in the country.
However, Hogan typically recommends that anyone staying longer move their U.S. investments into a Canadian brokerage account, especially if their total foreign assets cost more than $250,000 and would trigger the more detailed reporting requirements. The T1135 has a special section for taxpayers who have accounts with Canadian-registered securities dealers and trust companies, allowing the aggregation of foreign property in the account on a country-by-country basis rather than reporting asset by asset.
“If you have a portfolio with a U.S. brokerage, then you need to report individual securities on a detailed basis. When that happens, the cost of preparing your T1135 can easily exceed the cost of doing your whole tax return,” Hogan said.
Another emerging source of uncertainty for taxpayers is the status of cryptocurrency. The CRA has stated that cryptocurrency would be considered specified foreign property “to the extent that it is situated, deposited or held outside of Canada and not used or held exclusively in the course of carrying on an active business.”
Oakey said the CRA’s position fails to provide guidance on how to determine location. Cryptoassets “don’t fit neatly into any of the legislated definitions. They are anywhere, everywhere and nowhere, all at the same time,” he said.
For example, crypto investors whose assets are held in a physical “cold” wallet such as a USB key could argue the crypto is located in Canada, but Oakey is unsure whether the CRA would agree.
In a statement emailed to Investment Executive, CRA spokesperson Anne-Flore Gnamaka acknowledged the complexity of establishing the location of an asset with the decentralized nature of cryptocurrency, advising that determinations would be made on a “case-by-case basis.”
The CRA is reviewing how to determine the location of cryptocurrency for reporting purposes, she said.
In the meantime, Oakey said, taxpayers can take one of three positions: they could decide the crypto holdings are reportable, disclose them and make a best guess at location; they could determine the holdings are unreportable and leave them off the T1135; or they could leave the location undetermined but disclose them anyway.
While the CRA works on further guidance, Rotfleisch advises his clients to include cryptoassets on their T1135s.
“In our view, all cryptocurrency, regardless of where it is physically located, should be declared,” assuming the $100,000 threshold has been met, Rotfleisch said. “Even if it is in cold storage in a safe-deposit box in Canada, the wallet is not the crypto. The crypto is on the blockchain, which is in the cloud, and is arguably not in Canada.”
Taxpayers who neglect to report cyptoassets risk running into problems later if the CRA updates its guidance to require reporting, Oakey said: “If you finally realize it should be on your form and you include it in one year, the CRA may take a look back to see if you should have declared it earlier.”
What is “specified foreign property?”
Section 233.3(1) of the Income Tax Act defines specified foreign property as assets held in foreign bank and brokerage accounts, shares in foreign corporations, offshore real estate, interests in non-resident trusts or foreign mutual funds, as well as other tangible and non-tangible property held abroad, such as patents, copyrights and precious metals.
Penalties for filing the T1135 late
The minimum penalty for a late-filed T1135 form is $100, and accumulates at a rate of $25 per day, up to a maximum of $2,500. When failing to file is done knowingly, the penalty can rise to as high as $500 per month, up to a maximum of $12,000. If the CRA demands a return and the taxpayer fails to file, the maximum rises to $24,000 ($1,000 per month). After 24 months, the penalty is 5% of the specified foreign property’s cost minus penalties already levied.
Phil Hogan, partner with Hutcheson & Co., said late filers of T1135 forms who hope to avoid automatic penalties should apply to the CRA’s Voluntary Disclosure Program.