Taxpayers who own 'specified foreign property' with a combined cost of more than $100,000 at any time in a year must report the property on Form T1135.Adrian Wyld/The Canadian Press
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Canadians who fail to report certain foreign assets annually to the Canada Revenue Agency risk being audited and getting hit with significant penalties.
“People are often caught by surprise” by their foreign-asset reporting obligations, says John Natale, head of tax, retirement and estate planning services, wealth, at Manulife Canada in Toronto.
There’s a foreign property question on the income tax return, but he says, “it’s really easy for people to miss.”
The due date for foreign asset reporting is April 30 (June 15 for self-employed), the same deadline as for income tax returns.
Noah Weinstein, partner at Borden Ladner Gervais LLP in Montreal, says he’s seen an increase in CRA audit activity focused on foreign income and asset reporting.
Some of his clients now facing audits may have inherited a bank account or vacant land in a foreign country from their parents, but didn’t realize they had to report that property to the CRA.
Taxpayers who own “specified foreign property” with a combined cost of more than $100,000 at any time in a year must report the property on Form T1135, Foreign Income Verification Statement.
The obligation to file Form T1135 is separate from the obligation to report income earned on foreign assets on an annual income tax return.
Specified foreign property includes:
- bank and investment accounts held outside Canada;
- shares of foreign companies (even if listed on a Canadian exchange);
- shares of Canadian companies held in a foreign brokerage account;
- debt of a foreign issuer;
- foreign rental real estate or land.
Specified foreign property does not include:
- foreign real estate owned primarily for personal use;
- foreign assets held in Canadian registered plans (e.g. an RRSP)
- foreign assets held in Canadian mutual funds or exchange-traded funds;
- foreign currency accounts at Canadian banks;
- foreign retirement accounts (e.g. a U.S. 401K).
If the total specified foreign property in a tax year has a cost of less than $250,000, taxpayers can provide information about the property in aggregate, rather than property by property.
However, if a taxpayer’s total specified foreign property has a cost of $250,000 or more, they must disclose detailed information about each property they own.
(If they hold foreign property with a Canadian-registered securities dealer or trust company, they can report that information in aggregate on a country-by-country basis.)
The penalty for filing Form T1135 late is $25 a day (with a $100 minimum) to a maximum of $2,500. The CRA imposes the failure-to-file penalty even if the taxpayer reported the income they earned on that foreign property on their income tax return by the due date.
The CRA may also impose additional gross-negligence penalties if they believe the taxpayer knowingly failed to file Form T1135 or provided false information.
Penalties can “add up really fast” for taxpayers who have owned foreign property for multiple years without reporting, Mr. Weinstein says.
Taxpayers in these circumstances might consider applying for relief from penalties under the CRA’s voluntary disclosures program. “[It’s] usually our best option,” he says.
In some circumstances, taxpayers might consider selling a property to eliminate the need to report annually, Mr. Weinstein says.
“As soon as you’re aware you’re inheriting a foreign asset that would trigger a T1135 obligation, the first question to ask yourself is, ‘Do I want to hold this asset?’”
Mr. Natale says clients might also consider trying to stay under the $250,000 detailed reporting threshold by, for example, transferring foreign investments into registered accounts or moving cash held in a foreign bank account to Canada.
“[It’ll] make your tax reporting a lot easier,” he says.