Canada Revenue Agency has its sights on undeclared foreign income. Foreign investments, including property, are not immune to scrutiny.
Does your portfolio contain foreign investments? Do you own real estate outside Canada?
Make sure your tax specialist is aware of this well in advance of tax season. Often this information is not readily available and takes a long time to amass. And, Canada Revenue Agency (CRA) has started to play hardball and automatically impose hefty penalties on taxpayers who do not file reports of foreign property and income by their tax return due date.
Getting more Canadians to pay tax on their foreign as well as domestic income is just one more way CRA is trying to recoup the staggering $8 billion in unpaid taxes that individual Canadians have accrued over the years.
Ten years ago, the government decided to get serious about identifying Canadians with offshore investments and introduced new rules that required taxpayers to report specified foreign property holdings with a total aggregate cost of more than Can$100,000 on their personal income tax returns.
Canadians are investing more and more offshore, but many are not paying income tax on the income earned on these investments. Since international tax avoidance and evasion continues to be a major problem, CRA has been strengthening its audit programs to counter these aggressive international tax practices.
CRA has already taken actions to bolster its capacity and ability to identify and combat abusive schemes that take advantage of offshore jurisdictions with little or no taxes, strict bank secrecy laws, and little exchange of information with other countries. More field auditors have been assigned to do both regular international audit work and targeted projects involving offshore jurisdictions, and staff training on detecting abusive schemes has been increased.
In addition, new legislation has been introduced to help address potentially abusive situations concerning non-resident trusts and foreign investment entities. CRA also participates in a number of international groups that work together to combat offshore abusive tax schemes.
When it comes to knowing what you need to track and report, your tax return and Form T1135 - Foreign Income Verification Statement is a good place to start. First, the T1 tax return on Page 2 asks the question, "Did you own or hold foreign property at any time in the year with a total cost of more than Can$100,000?" If the answer is "Yes", then you need to complete Form T1135 and file it with your income tax return by the due date. It details the types and values of your foreign property.
The types of specified foreign property that you must report, as listed on the Foreign Income Verification Statement, are as follows:
Funds held outside Canada
These include money on deposit in foreign bank accounts and held in foreign safe deposit boxes. Included are negotiable instruments such as cheques or bank drafts.
Shares of non-resident corporations, other than foreign affiliates
These shares must be included whether or not they are listed on a stock exchange or physically held or on deposit with either a Canadian or foreign broker. You don't include shares in a corporation that is your foreign affiliate.
Indebtedness owed by non-residents
You must report all amounts owed to you by non-resident persons, including promissory notes, bills, bonds, commercial paper, loans and mortgages. Again, you do not include indebtedness owed to you by your foreign affiliate.
Interests in non-resident trusts
The few exceptions here include a trust that is your foreign affiliate and one that is governed by a U.S. individual retirement account.
Real property outside Canada
These include all real estate held outside Canada other than that used for personal use or in an active business. If you have a rental property outside Canada, for example, it must be included.
Other property outside Canada
These include precious metals, stones, or gold and silver bullion situated outside Canada; shares in corporations resident in Canada held by or for you outside Canada; and commodities and futures contracts, options or derivatives that constitute the right for you to acquire an interest in specified foreign property.
Specified foreign property does not include:
- Property in your RRSP, RRIF or RPP;
- Mutual funds registered in Canada that contain foreign investments;
- Personal-use property, such as a vacation property used mainly as a personal residence; or
- Property you used or held exclusively in the course of carrying on an active business.
Here are some typical situations in which taxpayers would have to decide if they needed to report foreign income.
An Ontario farmer owns a condo in Florida that cost Can$150,000. From December through March he and his family stay at the condo full-time. For the remaining eight months of the year, he rents out the condo.
In this situation, the farmer would need to file Form T1135 for two reasons. First, the property cost more than Can$100,000. Second, the condo is not held primarily for personal use, but is an income-earning investment.
An individual owns shares in General Electric and Caterpillar, corporations based in the United States, that cost Can$250,000. But his Canadian brokerage firm holds the shares for him.
In this case, even though his shares are physically held in Canada, they still are shares of a non-resident corporation and worth more than Can$100,000. Completion of Form T1135 is needed.
A taxpayer holds units, with a cost of Can$125,000, in his bank's global equity mutual fund, which invests only in foreign securities.
If the mutual fund trust is resident in Canada, the taxpayer would not need to file Form T1135 because the type of investments held by the fund do not determine the trust's residency status. Should the mutual fund trust be non-resident, however, Form T1135 might be required.
Penalties For Late Filing
CRA automatically levies penalties of $25 per day (minimum $100) to a maximum of $2,500, with interest accruing until the penalty is paid, for not filing an annual Foreign Income Verification form on time. But if you actually knew or should have known that Form T1135 was required and still filed late, there is a further penalty of $500 per month for up to 24 months ($12,000 maximum). After 24 months, there is an additional penalty which (if greater) increases the total penalty to 5% of unreported amounts. Compounded failure to report the income on these investments on your return would attract additional penalties.