Canada Revenue Agency has recently passed into law new reporting requirements for foreign property. These new requirements significantly increase the amount of information disclosed about your investments beyond what you may be accustomed to providing us. The purpose of this letter is to outline what is now required to be reported, the information required to comply with the requirements and recommendations as to how compliance can be maintained without a significant increase in fees.
Overall Changes to the Reporting Requirments
The old T1135 required you to report only two items of information for your overall asset holdings:
- The total cost of the foreign property, at the end of the year, within pre-defined ranges, which were (1) over $1 million; (2) over $700,000, (3) over $500,000, (4) over $300,000, over $100,000 and under $100,000.
- The total amount of income earned from the assets held.
Therefore to comply with the old rules, you were only required to know very roughly how much your foreign assets cost. Furthermore, you only had to know what the maximum cost of your foreign property, in total, was during the year, and the actual cost at the end of the year. The total amount of income earned is generally fairly easy to determine in most cases, because the amounts are usually readily known, and it was just a matter of adding them all up.
Under the new rules, CRA wants to see detailed disclosures for each and every foreign property that is held by the taxpayer, not just the overall cost. Now they want to know how much income was reported for each asset, and actual cost figures for each asset.
Common Misconceptions About the Applicability of the Reporting Requirements
We have encountered many situations in which clients were not complying with the reporting requirements because they thought they were exempt from them, when in actual fact they were not. The main misconceptions underlying this belief are:
- Concluding that they were exempt if they had less than $100,000 worth of foreign property at the end of the year, and
- Concluding that their investment portfolios were exempt because they are all managed by a Canadian brokerage firm, investment firm, or bank.
- Overlooking foreign properties that generate no income, such as loans to non-residents, real estate, or cash balances held at foreign banks.
The $100,000 reporting threshold is based on the cost (not market value) of property held at any time in the year. So you have to determine whether, at any point, the cost of your foreign property was higher than $100,000. If it was, then you are required to file the T1135, even if you held no foreign property at all on December 31. There are fairly significant penalties for failing to file this form, and the Voluntary Disclosure program, under which the forms can be filed late without penalty does not become effective until the forms are at least a year late. In addition, the period during which CRA can legally go back and reassess you will increase by three years if you do not comply with these reporting requirements. So it is very important to understand what foreign property is and to determine whether you are required to file, and then do so in a timely fashion.
Foreign Property includes shares of foreign corporations held in Canadian brokerage accounts. So it is necessary to be able to identify which of your stocks is foreign, so that you can determine whether or not the cost of these properties exceeds $100,000. Generally speaking, shares held in a US denominated brokerage account will all be foreign, while most stocks held in a Canadian dollar account will not be. However, there are sometimes US companies found in Canadian denominated brokerage accounts. If in doubt, it is a good idea to search the company on Google and visit their website to determine if they are a foreign based corporation. This will usually be apparent from the address or other contact information shown on the website.
Exceptions to the Requirements
Although the scope of required disclosure has expanded significantly, there are some notable exceptions that will result in many taxpayers effectively being exempt from reporting:
- Canadian based mutual fund investments are all exempt, regardless of what is held inside those funds. The reason is that the mutual fund itself files its own disclosures.
- Investments contained in RRSP’s and Tax Free Savings Accounts (TFSA’s) are all exempt.
- Investments for which the income has been reported on a T3, T5 or T5013 slip are exempt.
- Real estate property that is held for personal use and is not rented out is exempt.
The third exemption applies only on an investment by investment basis. Many brokerage houses such as CIBC Wood Gundy will issue a single T3 or T5 that covers all the income generated by the entire portfiolio. But this does not mean that you can simply ignore the whole portfolio. You actually have to analyze the portfolio to identify foreign stocks that have not paid any income included on the T3 or T3 slip and then determine whether or not you exceed the $100,000 threshold.
Required Disclosure for Each Property
The information required to be disclosed for each foreign property now consists of:
- The country code for the country in which the property is located. For corporate stocks, this would generally be the country in which the head office is located.
- The amount of income or loss from each property. This includes dividends received, interest accrued or received and capital gains or losses resulting from the disposition of the property.
- The maximum cost amount for the property during the year.
- The cost amount of the property at year end.
- Income or capital distrubutions received from non-resident trusts.
Impact on Fees and Suggested Strategy for Minimized Impact on Fees
In many cases, items 3 and 4 above will be the same, but if you regularly buy and sell foreign securities, then determining the maximum cost amount, and ending cost amount of the property could require you to summarize all the transactions and maintain Excel spreadsheet calculations of the cost. Even identifying the income and loss for each property could involve a significant amount of work, since you may have to add up several types of income for each of several different properties.
If you would like us to prepare all of these calculations and obtain this information in preparing your tax return, then our fees for the preparation of your income tax returns will be much higher this year than you are accustomed to. Unfortunately it is impossible to generalize about how much more it will cost to prepare your tax return under this circumstance, since the amount of time involved will vary greatly from client to client, and from year to year.
Consequently, it is our suggestion that you make every attempt to gather as much of this information as possible before the beginning of February 2014 so that it is all available when it comes time for us to prepare your tax return. If you can provide us with a schedule that lists your properties, provides a maximum cost amount, a year end cost amount, a country code and an income/loss amount for each property, then we will prepare your tax returns for a fee close to what you have paid in previous years.
For those of you whose investments are managed by a broker, we would suggest that you contact him or her as soon as possible, provide a copy of this letter, and explain that you need him or her to prepare this information for you by the end of January 2014. If you do not have a broker, or your broker is unwilling to do this, then you should contact us directly, and we can show you how to prepare it.
For more information, visit CRA’s website, at the following link: