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Some recent changes to the foreign property reporting requirements for Canadian taxpayers can increase the reporting obligations on those who invest actively outside Canada.

General reporting requirements

Since 1998, Canadian taxpayers (individuals, corporations and trusts) have been required to report any foreign property owned during the tax year if the cost base of all foreign property exceeded $100,000 at any point during the year, along with the income earned during the year from that property. This reporting is accomplished by filing a T1135, Foreign Income Verification Statement, with the Canada Revenue Agency (CRA) at the same time as the taxpayer’s tax return.

The types of foreign property that must be included on the T1135 include:

• funds held outside Canada (funds held in a foreign currency at a Canadian bank are exempt);
• shares of non-resident corporations, other than foreign affiliates (shares held within a registered plan, such as an RRSP, RRIF, or TFSA, are exempt);
• indebtedness owed by non-residents (includes private mortgages, foreign bonds, etc.);
• interest in non-resident trusts (may include an interest in a foreign estate or other family trust);
• real property outside Canada (excludes personal-use property, such as vacation properties, vehicles, artwork, etc., and real estate used in an active business); and
• other property outside Canada.

Failure to file the T1135 by the tax-filing due date can result in substantial penalties ranging from $25 per day (with a minimum $100 penalty to a maximum of $2,500) to as high as $1,000 per month in cases of gross negligence (to a maximum of $24,000), or even potentially 5% of the cost of the unreported assets.

Historically, the information disclosure on the T1135 has been quite basic, requiring only:

• a range for the cost base for the above-listed property categories;
• the total income earned in the year from all foreign property; and
• the geographic region in which the foreign property was held.

New reporting requirements

For tax years ending after June 30, 2013, the T1135 has been amended to require significantly more information. For each foreign asset that must be reported to the CRA, the following information is now required:

• a description of the asset;
• the country in which the asset is held;
• the maximum cost base of the asset during the year;
• the cost base at the end of the year;
• any income or loss from the asset; and
• any capital gain or loss from the disposition of the asset.

Fortunately, there is one additional exception that has been added to the T1135 reporting requirements. If income has been earned from a foreign property held by a Canadian brokerage, and a T3 or T5 has been issued in the year in respect of that income, that foreign property need not be included on the T1135. However, a box indicating that the assets meet the exception must be checked off on the form. If a T3 or T5 is not issued in a particular year, the foreign property in question must be included on the T1135 for that particular year.

Despite this minor exception, the fact that foreign assets must now be reported individually instead of in groups could result in significant reporting requirements going forward. For example, once the $100,000 threshold is reached (perhaps via a rental property outside of Canada), then all foreign assets owned during the year not exempt from reporting will have to be included on the T1135. This requirement could even apply to a single foreign stock held for only part of a day!

Needless to say, these new foreign property reporting requirements for Canadian taxpayers actively investing outside of Canada could become very onerous, very quickly. If you own foreign property, contact your Collins Barrow advisor to help determine how these new reporting requirements will affect you.

Ben Berci, CPA, CA, is a Tax Manager in the Banff office of Collins Barrow.