Who needs to file a T1135 and When?
Canadian tax-residents are taxable on their worldwide income. First, it’s important to know that tax-residence has nothing to do with immigration status. You can be a Canadian citizen and be a non-resident for tax purposes, and you can be a visitor to Canada and become a tax-resident. Second, if residents are taxable on their world-wide income, how can the Canada Revenue Agency (“CRA”) confirm if and how much income people earn from off-shore sources?
The CRA has a number of tools at its disposal, including getting information from foreign governments and banks, but one method the CRA uses looks to the taxpayer. The foreign Investment Verification form, or T1135, is a form that has to be filled out and filed with the CRA by any taxpayer who, during a tax year, owns foreign property the combined value of which exceeds $100,000 Canadian. This doesn’t mean that all year long the value of the property has to be more than $100,000. Rather, if at anytime in a year, even if only due to currency fluctuations, the value of foreign property exceeds $100,000 Canadian, the form has to be filed. The T1135 form is due to be filed on the same date as the taxpayer’s income tax return is due. Failing to file the T1135, or filing it with incomplete or inaccurate information, will result in the CRA assessing penalties.
The penalty for not filing a T1135 results in an automatic penalty, whether or not the taxpayer knew of the filing obligations. The penalty starts at a minimum of $100, but is calculated at $25 per day for up to 100 days. The maximum penalty for each tax year is $2,500. In addition to this automatic penalty, the CRA may also choose to assess gross negligence penalties against a taxpayer. These are much more harsh and consist of $500 per month for a maximum of 24 months, or a total of $12,000. Penalties again increase if you’ve been contacted by the CRA and have received a demand to file a return. The penalties at this point increase to $1,000 per month for a maximum of 24 months, or a total of $24,000. The penalty for making false statements or failing to report required information on a T1135 is not applied automatically, but only where the taxpayer is grossly negligent. The penalty amount is the higher of 5% of the cost of the specified foreign property or $24,000.
A few additional important things to keep in mind. The property whose value is counted towards the $100,000 total, for purposes of the T1135 form, is income earning property. This means that personal property, like a vacation home, is not included. There are certain properties that must be reported on a T1135 even if not meeting the $100,000 threshold. These are called specified foreign properties, and include foreign bank accounts, shares, and intellectual property. This includes interests in partnerships or joint ventures that hold specified foreign properties, and also properties that are convertible into or exchangeable for specified foreign properties, but does not include properties used exclusively in carrying on an active business and a few other properties. The value threshold of $100,000 is in Canadian dollars. This means that you need to convert the foreign currency or currencies into Canadian dollars, keeping in mind currency fluctuations during the year.
The final thing to keep in mind is that the $100,000 threshold is based on either the adjusted cost base (ACB) of the property or, if the property is depreciable, the undepreciated capital cost (UCC) of the property. Generally, ACB is the original cost of the property plus any costs of acquiring it, and UCC is the residual value of the property after tax-depreciation is taken. In other words, the historic cost paid for the property or the residual value of the property, and not the property’s current fair market value. This means you don’t have to worry about appreciating property prices. The only exception to using fair market value is if you’ve received the property as a gift, or as an inheritance or bequest. This is because the cost amount to you of such property is the fair market value of the property at the time you received the gift, inheritance, or bequest. Any appreciation in value after this date is not considered.
The T1135 form itself uses a two-tiered structure. If your foreign property exceeds the $100,000 limit but the total is less than $250,000, you only need to fill out the simplified reporting structure in Part A of the T1135. The simple reporting take the form of checking off the types of property with no need to provide details about each type of property. If, however, the total value in the year exceeds $250,000, then you have to use the much more detailed reporting structure in Part B of the T1135. Part B requires a detailed description of each foreign property owned by the taxpayer. Again, currency fluctuations can push you from Part A to Part B, or back, if the foreign property value is close to the $250,000 dividing line. If the $250,000 threshold is crossed at any point in the year, then the more onerous reporting requirements apply even if the value of the properties falls below this at the end of the year.
If you have failed to file or have filed an incorrect or incomplete T1135 forms in the past, all is not lost. You can use the CRA’s Voluntary Disclosure Program to make up for past shortcomings and avoid penalties that would otherwise apply. There are some preconditions to being able to access this program and benefit from the penalty relief it provides.