PLEASE NOTE: THIS INFORMATION WAS ORIGINALLY SUBMITTED BY COOPERS & LYBRAND, CANADA
The 1995 federal budget proposed the introduction of new foreign reporting requirements for individuals, corporations, trusts and partnerships for taxation years beginning after 1995. Included was the proposal requiring the annual reporting of specified foreign property exceeding $Cdn 100,000 in cost.
The main impetus for this proposal was a growing perception that Canadians are able to escape Canadian taxation by making investments in tax havens. Canadians are investing offshore with increasing frequency and there are indications that some are not reporting their foreign income to Revenue Canada and are therefore not paying tax on that income. This violates the basic principle that residents of Canada are taxed on their worldwide income. It also creates inequities for taxpayers who are reporting all of their income from domestic and foreign sources because they must shoulder a greater portion of the tax burden.
Chronology of the New Rule
Draft legislation and information returns to implement the 1995 proposal were released on 5 March 1996. Following a consultation process that included taxpayers and tax professionals, several changes to the draft legislation were made. The legislation was introduced in the House of Commons on 5 December 1996 and became law on 25 April 1997 when it received Royal Assent.
Under the reporting requirements, Canadian residents must disclose to Revenue Canada information on certain foreign property where the aggregate original cost exceeds $100,000, any interests in foreign affiliates and certain transactions with foreign trusts.
Some Canadians objected to the requirement for Canadian residents to report specified foreign property over $100,000.
On 2 October 1997, the Ministers of Finance and Revenue Canada announced that the government was delaying the requirement to report specified foreign property over $100,000 from the first reporting date of April 1998 until April 1999. The other reporting requirements, however, remained intact. In the interim, the Ministers asked the Auditor General of Canada to perform an independent review of the $100,000 specified foreign property reporting requirements.
Need for Reporting Confirmed
After an in-depth review, the Auditor General concluded, earlier this month, that the requirement was justified and appropriate because there is a potentially serious erosion of the tax base. It is anticipated that the Ministers of Finance and Revenue Canada will shortly announce an amendment to the first required reporting year under the $100,000 specified foreign property rule from 1996 to 1998, with the initial reporting due by April 30, 1999. Related legislative changes will also be required.
What Must be Reported Under the Specified Foreign Property Reporting Requirement
"Specified foreign property" includes foreign bank accounts, rental property outside Canada, Canadian securities held outside Canada, as well as investments in foreign corporations, trusts, partnerships and other foreign entities. Neither property used exclusively in an active business nor personal-use property have to be reported.
Canadian resident individuals, corporations and trusts who own "specified foreign property" of $100,000 on an aggregate basis at any time in the year are required to disclose certain information about the property to Revenue Canada (the $100,000 threshold is per person, not per family). A partnership that is more than 10% Canadian owned in terms of its entitlement to income must also file a return. The draft reporting form (T1135) requires the taxpayer to describe the foreign property, disclose its cost and whether any income was earned from the property during the year. We expect this draft to be modified somewhat and reissued during the summer.
An individual is exempted from the reporting requirements in the year he or she becomes a resident of Canada. This exemption is intended to allow new immigrants an additional year to familiarize themselves with Canada's tax system and to gather the necessary information to be able to comply with the reporting requirement.
There are severe penalties under the legislation for failing to file the required information return with Revenue Canada or for making a false statement or omission on the return.
Examples:
The following are examples provided by governmental officials of situations where a taxpayer would be required to file a T1135 return:
An individual owns shares in a non-resident corporation with a cost amount of $75,000 and a bank account in the United States with $35,000 on deposit. The return should be filed as the total cost amount of all specified foreign properties owned exceeds $100,000.
A husband and wife have a joint foreign bank account and joint ownership of other foreign property. The total cost of the foreign property owned jointly is $180,000. The proportionate ownership of the foreign property will be based on the amount contributed by each person. If the contribution by either person is more than $100,000, then that person must file Form T1135.
An individual owns shares in non-resident corporations with a total cost amount of $250,000. These shares are held by a Canadian stockbroker. As the cost amount of the shares exceeds $100,000, the shares should be reported on Form T1135 regardless of whether the shares are physically held inside or outside Canada.
An individual owns $200,000 in U.S. treasury bills. Indebtedness owed by a non-resident should be reported on Form T1135, even if the treasury bills are not held at year-end.
The following are examples of situations where a taxpayer would NOT be required to file a T1135 return:
A self-directed Registered Retirement Savings Plan that has over $100,000 in foreign securities, because a trust governed by an RRSP does not have to file Form T1135.
Units in a mutual fund trust that invests entirely in foreign securities where the cost amount of the units is $150,000. If the mutual fund trust is resident in Canada, Form T1135 does not have to be filed by the owner of the units.
A condominium in Florida with a cost amount of $120,000. If the condominium is personal-use property (used by the taxpayer or a related person primarily for personal use and enjoyment), it does not have to be reported on Form T1135. If the property is rented out with a reasonable expectation of profit, Form T1135 has to be filed.
A warehouse in England with a cost amount of $900,000 owned by a Canadian corporation and used to store its products for distribution. The corporation does not have to report this on Form T1135 because the warehouse is used exclusively for storing inventory used in the corporation's business. Foreign property that is used or held exclusively in an active business is not "specified foreign property" and therefore does not have to be reported.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a Coopers & Lybrand professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your Coopers & Lybrand advisor, or: David W. Steele, Coopers & Lybrand, 145 King Street West, Toronto, Ontario M5H 1V8 Canada, Fax: 1-416-941-8415,
David W. Steele PricewaterhouseCoopers 145 King Street West Toronto, Ontario M5H 1V8 Canada Fax: 1-416-941-8415 E-mail: Click Contact Link
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