What is an Individual Savings Account?
The term Individual Savings Account, or ISA, refers to a class of investments that are available to residents of the United Kingdom. After-tax income is invested into a UK ISA account , however investment returns earned in ISAs, including capital gains, are exempt from income tax in the United Kingdom. Essentially, ISAs are the UK-equivalent of Canadian Tax-Free Savings Accounts. The purpose of this Toronto Tax Lawyer tax analysis article is to give a brief overview of the Canadian tax treatment of income and capital gains earned in ISAs, while also providing tax tips on how to rectify any past non-compliance with Canadian tax laws with respect to ownership of an ISA through a CRA voluntary disclosure.
Canadian Tax Treatment of ISAs
Contrary to their tax treatment in the United Kingdom, income and capital gains earned in an Individual Savings Account by Canadian resident taxpayers are subject to taxation in Canada. Canadian resident taxpayers are subject to tax on their worldwide income and there is no exception to this general rule for ISAs in either the Canadian Income Tax Act or the Tax Treaty between Canada and the United Kingdom. This position is in line with multiple CRA publications that specifically discuss UK ISAs. In addition, UK ISAs falls within the definition of “specified foreign property” in subsection 233.3(1) of the Income Tax Act and are thus subject to the CRA Form T1135 Foreign Income Verification reporting regime if their “cost amount”, which for savings accounts is typically their balance, is in excess of CAD $100,000. Therefore if a resident Canadian taxpayer in a given tax year owns an Individual Savings Account with a cash value of more than CAD $100,000, or if that same taxpayer owns an ISA and other specified foreign property, which in the aggregate have cost amounts of more than CAD $100,000, the taxpayer is obligated to annually file Form T1135 with CRA and disclose their ownership of the ISA.
Voluntary Disclosure for Failure to Report UK ISA
The failure to report income to Revenue Canada as required by the Income Tax Act can result in penalties equal to 50% of the resulting taxes owing being assessed to a taxpayer and can even result in criminal prosecution. Likewise, the failure to file form T1135 with CRA carries an automatic minimum penalty of $2,500 for each annual failure to do so. However if the failure to file is done knowingly or under circumstances amounting to gross negligence, the penalty is $500 per month for up to 24 months up to a maximum $12,000. Furthermore if CRA issues a demand to file a T1135 under subsection 233(1) and the taxpayer knowingly or under circumstances amounting to gross negligence fails to comply with the filing demand, the penalty is $1,000 per month for up to 24 months to a maximum of $24,000 but after 24 months, the penalty becomes 5% of the cost of the foreign property. Since this is an annual form 5 years of non-filing can lead to a penalty of 50% of the asset value and 10 years to the entire asset value.
Resident Canadian taxpayers who own UK ISAs and have not reported income earned in their ISA, or who have failed to report their ownership of the ISA on Form T1135, may be eligible for Revenue Canada’s Voluntary Disclosures Program (VDP or tax amnesty) if:
- CRA has not contacted you about the unreported income and/or failure to file form T1135;
- At least one year has passed since you were required to report the income and/or file the form T1135;
- The failure to file form T1135 is subject to a penalty; and
- The voluntary disclosure identifies all areas of the taxpayer’s non-compliance with the Income Tax Act.
If the above pre-requisites are met, our experienced Canadian tax lawyers are able to make a successful VDP or voluntary disclosure to CRA for the failure to report income earned in a UK ISA or for the failure to file form T1135 as and when required by the Income Tax Act. A successful voluntary disclosure completely eliminates penalties, removes the possibility of tax evasion prosecution and typically offers partial interest relief on any taxes that may be owing.
Conclusion Failure to Report UK ISA
Income and capital gains earned in UK Individual Savings Accounts are fully taxable in Canada and, depending on the size of the ISA, may also be reportable to CRA on Form T1135 as specified foreign property. CRA’s Voluntary Disclosure Program (VDP) is an effective means to remedy prior failures to report income and capital gains earned in an ISA, and past failures to file Form T1135 with respect to the ISA, without the risk of being pursued for onerous penalties and tax evasion prosecution. A successful voluntary disclosure typically also results in significant interest relief being granted by CRA on any amounts owing. If you own assets abroad and are unsure about how they are treated under Canadian Tax Law, speak with one of our leading Toronto tax lawyers to identify your tax reporting obligations and get advice on how to rectify any previous tax non-compliance.