Canada: Canadian Foreign Reporting Obligations

With the recent release of the International Consortium of Investigative Journalists' (ICIJ) investigation of offshore tax havens used by a law firm based in Panama (known as the "Panama Papers"), the question of what Canada is doing to ensure that its taxpayers are disclosing offshore assets and reporting the related income is front and centre in the minds of many taxpayers.

Since 1998, Canadian taxpayers (individuals, corporations, partnerships and trusts) have been required to file Form T1135, Foreign Income Verification Statement, to report all specified foreign property owned during the tax year if the cost of such property exceeds $100,000.

Specified foreign property is a defined term in the Income Tax Act (ITA) and includes the following:

  • funds or intangible property (patents, copyrights, etc.) situated, deposited or held outside Canada; 
  • tangible property situated outside Canada;
  • a share of the capital stock of a non-resident corporation;
  • an interest in a non-resident trust that was acquired for consideration;
  • an interest in a partnership that holds a specified foreign property unless the partnership is required to file Form T1135;
  • a property that is convertible into, exchangeable for or confers a right to acquire a property that is specified foreign property;
  • a debt owed by a non-resident, including government and corporate bonds, debentures, mortgages and notes receivable;
  • an interest in a foreign insurance policy; and
  • precious metals, gold certificates and futures contracts held outside Canada.

Since its inception in 1998, Form T1135 has gone through one main redesign, having been quite basic until the 2013 taxation year, at which point the form was amended to require significantly more information, making its completion quite onerous.

For the 2015 taxation year, Form T1135 was redesigned again to implement a two-tier information reporting structure for specified foreign property. Under this two-tier structure, the reporting has been simplified for taxpayers who hold specified foreign property with a total cost of more than $100,000, but less than $250,000. This simplified reporting resembles the earlier version of Form T1135 that was in place prior to 2013. For taxpayers who hold specified foreign property with a total cost of more than $250,000, the detailed reporting method continues to apply.

Failure to file Form T1135 by the due date of your income tax return can result in significant penalties, ranging from $25 per day (minimum $100 and maximum $2,500) to a maximum of $1,000 per month (maximum $24,000) in cases of gross negligence, or even potentially 5% of the cost of the foreign property (after 24 months). Failure to report significant offshore income can result in criminal prosecution.

Canada Revenue Agency's (CRA) efforts to combat international tax evasion and aggressive tax avoidance extend beyond imposing penalties for failing to file Form T1135 and/or reporting offshore income and includes the Offshore Tax Informant Program (OTIP), which allows the CRA to offer financial awards ranging from 5% to 15% of federal tax collected if the information provided about international tax non-compliance helps CRA assess federal taxes of at least $100,000. Furthermore, the 2016 Federal Budget has committed $444 million over the next five years to be put towards these efforts.

The government's reach is also extending beyond taxpayers. The Department of Finance released draft legislative proposals on April 15, 2016 to implement the Common Reporting Standard (CRS), which will require financial institutions in Canada to identify accounts held by non-residents and to report information, including account balances, interest and dividend income and sale proceeds to the CRA. Financial institutions will have until July 1, 2017 to have these procedures in place. More than 90 jurisdictions have committed to implement the CRS, which was developed by the OECD. Once this is in place, Canada will receive similar information from other jurisdictions with regards to assets held in those jurisdictions by Canadian residents.

Given the increased efforts by the CRA to target tax evasion, taxpayers are wise to review their foreign asset holdings.

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.

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