Posted: January 27, 2015 By: Alan Rowell
Posted in: Breaking News, Tax Planning, 
Around the world today, more than 123 countries and jurisdictions are now committed to tax and financial information sharing with targeted implementation by September 2017.
Canada is involved, and, over the past 24 months has actively tailored its systems and requirements to enable Canada to participate fully in the Tax Information Exchange Agreements, which brings us to Form T1135 – Foreign Income Verification Reporting.
How did this happen?
Sometime prior to 2006 - some reports are as early as 2002 - a bank computer technician walked out of a bank in Switzerland with the electronic files of foreign nationals who had money invested with their employer. His concern was that individuals around the world were avoiding taxation, and he was helping them do it.
This enterprising individual then offered the files for sale to each and every country affected and reportedly sold files to the German Foreign Intelligence Service for a reported $4 million. He was then charged with theft and breach of trust under Swiss banking laws, went to jail for four years and was then released to enjoy his $4 million. You will recall that this was fully reported in April 2013 when released by the International Consortium of Investigative Journalists.
Foreign Income Verification Statement
Form T1135 is designed as an “information only” form tied with the personal tax return. While it is not actually part of the tax return, the due dates coincide with the due dates of tax returns, thereby tying it to the T1 return.
In general, any individual, partnership, corporation or trust which holds a foreign asset, is a beneficiary of a foreign holding or has a right to acquire a foreign holding which totals to an aggregate cost exceeding $100,000 is required to file the information return. In general, reporting requirements consist of:
- The country where the asset is held
- The maximum cost during the year of the holding
- The cost at the end of the year and,
- The amount of any income earned or lost on the holdings
Taxpayers are not required to report certain assets and these items do not form part of the $100,000 aggregate cost required to trigger reporting requirements.
- Personal Use Property
- Property used exclusively in an active business
- Shares or indebtedness of a Foreign Affiliate
- Interest in an exempt Trust under ITA s.232.2(1)
- Registered funds, such as RRSP’s and RIF’s, and,
- A right to acquire any of the above.
Canada is serious about foreign holdings reporting and has added penalties in order to back up their resolve.
Failure to comply
$25 per day up to $2,500
Failure to furnish information
$500 per month up to $12,000
Failure to furnish information on demand
$1,000 per month up to $24,000
5% of cost or fair market value – whichever is the higher
Gross Negligence Penalties
False Statements or Omissions
Greater of $24,000 or 5% of:
- Cost of the foreign property or,
- FMV of the property transferred or loaned to a Trust, or
- Cost of shares and indebtedness of the foreign affiliate;
whichever is the greatest.
As in most situations, it’s always best to be pro-active. Regardless of their individual financial specialty, all financial advisors and their clients will be affected by Form T1135.
As advisors we need to gather the information our clients will need in order to comply with the legislation. We also need to educate our clients on their compliance responsibilities.
This is not an item that can be ignored. Specifically written into the legislation is a clause stating the due diligence is NOT a defence for non-compliance.
Form T1135 Foreign Income Verification Statement is designed as an “information only” form tied with the personal tax return. While it is not actually part of the tax return, the due dates coincide with the due dates of tax returns, thereby tying it to the T1 return. When filing their tax return, the taxpayer identifies the need for filing the T1135 by their answer to the question “Did you own or hold foreign property at any time in 2014 with a total cost of more than CAN$100,000?” on page 2 of the T1.
Parts 1, 3, 5, and 6
In general, any individual, partnership, corporation, or trust which holds a foreign asset, is a beneficiary of a foreign holding or has a right to acquire a foreign holding is required to file the information return if the aggregate cost of the asset or holding exceeds $100,000. Reporting requirements for Parts 1, 3, 5, and 6 consist of the following information requirements:
• The country where the asset is held
• The maximum cost during the year of the holding
• The cost at the end of the year and,
• The amount of any income earned or lost on the holdings
“T” Slip Exclusion No Longer Available
In 2013, taxpayers had the option of using the “T” slip exclusion option. This consisted of the ability to not report individual holdings if there was a Canadian T5 or T3 slip issued for the income earned on the investment. This option is not available for 2014.
Part 2 – Shares of non-resident corporations (other than foreign affiliates)
This is one of the most difficult areas of form T1135 to complete; simply because accurate records of the information are difficult to obtain. This section no longer includes shares that are managed by a Canadian Registered Securities Dealer or Canadian Mutual Fund. These assets are now included in Part 7.
Include in this section any foreign share holdings that the taxpayer purchased on their own, either on-line or on a foreign stock exchange. Report both the cost and any income earned on the investment.
Part 4 – Interests in non-resident trusts
Taxpayers who have a beneficial interest in a non-resident trust are required to report their interest in the trust, even though, technically, they may not own the foreign property. In addition, beneficiaries of a foreign trust are required to report the capital paid to them in the year.
Part 4 does not require the reporting of a Canadian mutual fund trust regardless of the underlying investments held with the trust. Since the mutual fund trust will be required to file their own T1135 and to report the investments held within the Trust.
Part 7 – Property held in an account with a Canadian registered securities dealer or a Canadian trust company
Investments held in portfolios with a Canadian registered securities dealer or a Canadian trust company now require the following reporting:
• Name of the securities dealer or trust company
• Country code of the Investment
• Maximum fair market value (FMV) during the year
• FMV at the end of the year
• Income earned including any Gain or Loss on disposition
Financial and Investment Advisors should have ready access to this information.
Form T1135 is not filed with the taxpayers’ tax return but is currently filed separately either electronically or by mail to the CRA Ottawa Technology Centre. Most professional tax software will allow for electronic filing of T1135 this tax season. Form T1135 is due on the same date as the entity’s federal tax return is due.
As with most areas involving government reporting requirements it is best to be proactive, therefore financial, investment and tax professionals should act now in order to pull together the information that will be required and to educate their clients about their responsibilities