Many taxpayers, typically higher net worth individuals, either knowingly or unknowingly hold an interest in some type of foreign investment property. With the proliferation of online brokerages and a seemingly infinite supply of unique investment options, the chances of owning foreign investment properties has increased dramatically in recent years. However, it is often unclear to the average taxpayer just what foreign property triggers the need to file the T1135 foreign reporting form, and some may not be aware of this requirement at all.
This question comes up in personal tax season quite frequently, with many taxpayers declaring – erroneously – that they do not own any foreign investment property. This can be a problem if it turns out that they do in fact own foreign investment property in excess of $100,000 and may have been required to file the T1135 form. Once an error is discovered, it is advisable to file historical T1135's to report foreign investment information under the Voluntary Disclosure Program. Failure to do so can result in non-filer penalties.
The general rules require that a T1135 be filed if at any time during the taxation year the total cost amount of all specified foreign property owned or held as a beneficial interest exceeds $100,000 (all figures CAN$). The form itself does not have an impact on taxable income; the Canada Revenue Agency uses it only to gather information. However, there are late filing penalties of $25 per day to a maximum of $2,500 in a particular taxation year. Consequently, ignoring the filing requirement can be costly.
Who must file?
Generally, any resident of Canada with specified foreign properties with a cumulative cost in excess of $100,000 must file a T1135. This would include individuals, corporations, trusts and partnerships. The "cumulative cost" includes specified investments in multiple foreign jurisdictions as well. For example, a taxpayer holding $50,000 in investments in Mexico and an additional $75,000 in the U.S. would be required to file, as the cumulative total of the two amounts exceeds the $100,000 threshold. Taxpayers sharing foreign investments with other individuals or entities must compute their pro-rata share of the cost of the investment and apply it to the total.
The rules state that foreign investments "held at any time during the year" qualify. Thus, taxpayers who buy and sell a foreign investment in excess of $100,000 in the same year must report it even if they no longer hold the investment at year end.
What is specified foreign property?
Generally, specified foreign property includes:
- foreign bank account balances
- shares of Canadian corporations on deposit with a foreign broker
- shares of foreign corporations
- foreign land and buildings
- precious metals, futures, etc. held outside Canada
- interests in foreign mutual funds
- debts owed by non-residents
- interests or rights in specified foreign property
- convertible property that can be changed for specified foreign property
- interest in a non-resident trust
- interest in a partnership that holds specified foreign property
- patents, copyrights or trademarks held outside Canada
- an interest or right in an entity that is non-resident
Specified foreign property specifically excludes:
- property used exclusively in the course of carrying on an active business
- property used for personal use (i.e. a vacation property)
- an interest in a U.S. Individual Retirement Account
- shares of a non-resident that is a foreign affiliate
- an interest in or indebtedness of a non-resident trust that is a foreign affiliate
- an interest in a non-resident trust that was not paid for
- an interest in or right to acquire any of the above-noted excluded property
While some of these inclusions and exclusions are obvious, others may not be. Consider a taxpayer who holds a mutual fund that is resident in Canada and owns significant foreign equity investments. If the taxpayer's pro-rata foreign ownership in these foreign investments is in excess of $100,000, does the taxpayer need to file the T1135? The answer is "no," because the mutual fund is resident in Canada and the mutual fund itself would be responsible for the foreign reporting, not the taxpayer. However, if the same pro-rata portion of the investments is held by the taxpayer in a brokerage account, the T1135 filing would be required.
What must be reported?
The rules indicate that the cumulative cost (generally, the original purchase price) in Canadian dollars of all specified foreign investments must be reported along with the income earned in a particular year. If a foreign currency conversion is required, the rate in effect at the time the property was acquired will apply. Note that increases or decreases in the fair market value have no bearing on the calculation once the investment is purchased. For example, if a taxpayer were to purchase a foreign equity interest through a Canadian brokerage account in the amount of $90,000, and the fair market value of the investment had increased to $105,000 by the end of the year, this investment, on its own, would not require the taxpayer to file a T1135. There is no need to report the exact amount of the cost of the investments, only the increments greater than $100,000, $300,000, $500,000, $700,000 or $1,000,000, as indicated on the form. Taxpayers must also indicate the total income reported from the investments as well as the foreign source where the investments are located using the appropriate check boxes.
When must the form be filed?
The T1135 is due annually at the same time as a taxpayer's corporate, personal, trust or partnership return.
The rules above provide a general overview of how the foreign reporting works. At the very least, they should get you thinking about whether or not you are required to file the T1135. Your Collins Barrow tax practitioner would be happy to help you understand and satisfy your foreign investment filing requirements. Most importantly, we can help you determine whether you are in default of any prior filing requirements, and then help avoid or minimize the related penalties.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.