Over the past year, the Canadian government has made it a priority to “crack down on international tax evasion and aggressive tax avoidance” and has, in doing so, proposed several changes to the Foreign Income Verification Statement (Form T1135). As a bit of a background, Form T1135 must be filed by most Canadian-resident individuals, corporations or trusts that, at any time during a year, owned specified foreign property (including most types of income-earning property held outside of Canada, other than personal property and property used in carrying on an active business) costing in total more than $100,000. Form T1135 must also be filed by partnerships that hold more than $100,000 in foreign investment property and whose non-resident members’ share of income or loss is less than 90% during the reporting period. As we reported last spring, the changes to Form T1135 announced in the 2013 federal budget include:
- Revising the form by requiring taxpayers to provide more detailed information regarding each specified foreign property.
- Allowing the form to be electronically filed.
- Extending the normal reassessment period of the tax return if certain conditions are met.
- Improving the form filing process by reminding taxpayers, on their Notice of Assessment, of the obligation to file Form T1135, and by clarifying the filing instructions.
New Form T1135
Consistent with these proposals, the Canada Revenue Agency (CRA) has released revised Form T1135
which must be used for 2013 and subsequent taxations years. The new form calls for more detailed information requirements for each specified foreign property including:
- The name of the specific foreign institution, investment or other entity holding funds outside Canada.
- The specific country to which the foreign property relates.
- The cost of the property at the end of the year, the highest cost amount during the year and the income or gains generated from the foreign property, on a property by property basis.
However, there is some good news for those taxpayers who hold foreign property through Canadian brokerage and investment accounts. The new Form T1135 states that “where the reporting taxpayer has received a T3 or T5 from a Canadian issuer in respect of a specified foreign property for a taxation year, that specified foreign property is excluded from the T1135 reporting requirement for that taxation year”. The form includes a box that must be checked where such property is held, so it appears that the form still does have to be filed even if all of the property is subject to T3/T5 reporting. A significant problem, however, is that the CRA states that the taxpayer must have actually received income in respect of the investment that is included in the T3 or T5. This may make the “check the box” option much less useful for some taxpayers, as it will be necessary to confirm whether income was received on an investment by investment basis. The CRA has received many complaints on this issue.
As it turns out, the CRA did listen and has responded to the concerns that were raised. Transitional relief for the 2013 taxation year only was announced on February 26, 2014. Under the CRA transitional relief, a taxpayer who held specified foreign property in an account with a Canadian registered securities dealer (which is a defined term that would cover most if not all Canadian brokers) may now report the combined value of all such property at the end of the tax year, rather than reporting the details of each property. This combined value should be included in "Other property outside of Canada" in Category 6 of Form T1135. If a taxpayer chooses to use the 2013 transitional reporting method, the taxpayer must use this reporting method for all accounts with Canadian registered securities dealers.
With this announcement, for the 2013 taxation year, taxpayers can either use the transitional reporting or, they can still check the box subject to the conditions and limitations noted above.
It is important to note that this transitional relief won’t apply for taxpayers who use a securities dealer outside Canada that is not a registered securities dealer. So, for those taxpayers that hold foreign property in accounts outside Canada, Form T1135 will still be far more complicated as specific details have to be disclosed on an investment by investment basis. The old form just asked for cost amount ranges for each class of foreign property, and it was often possible to do an accurate estimate without a detailed review of a taxpayer’s records.
When the transitional relief was announced, the CRA also stated that the filing deadline for Form T1135 for the 2013 tax year will be extended to July 31, 2014 for all taxpayers, in order to provide further assistance in the transition to the new reporting requirements.
Improvements to the filing process of Form T1135
One common complaint voiced by both taxpayers and tax preparers was the inability to file the T1135 form electronically along with the taxpayer’s tax return. The CRA has stated that electronic filing for the T1135 is being developed and the CRA will announce when electronic filing will become available. In the meantime, paper versions of the form should be filed as required.
Impact for corporations
Given that corporations are already filing tax returns for 2013, we asked the CRA when corporations must start using the new form. When making the request, we pointed out that the tax software used for corporate tax return preparation will contain the old form until the software has been updated. The CRA has announced that the new form applies to taxation years ending after June 30, 2013 only. Please keep in mind that this means that the old form must be filed for taxation years ending prior to July 1, 2013.
Extension of the normal reassessment period
In the past, unless an omission was due to neglect, carelessness or wilful default, the CRA was prevented from processing a reassessment for additional tax after the normal reassessment period, which is generally three years after the day a notice of an original assessment was sent to a taxpayer. For 2013 and subsequent taxation years, the budget proposed to extend the reassessment period for a tax year by three years if a taxpayer has failed to report income from a foreign property on their income tax return and Form T1135 was not filed, late filed or included incorrect or incomplete information concerning a foreign property.
Don’t forget that the CRA imposes very harsh penalties for those taxpayers that do not comply with their T1135 filing obligations. In fact, the CRA has created a Table of Penalties
on their website which details the type of penalty that they will impose. If you have any questions about the new Form T1135 and how you can avoid these penalties, contact your BDO advisor.