T1135 Foreign Property Reporting

The T1135 Foreign Income Verification Statement was initially mandated in 1998 and was significantly amended in June 2013. These changes are effective for all year-ends—businesses, trusts and individuals—ending after June 30, 2013. The fundamental purpose behind the form is to strengthen the reporting by Canadian resident tax-payers of all of their world-wide income. While the form is called an “income verification”, the income verification is purely second order….the form requires taxpayers to report their foreign assets! Presumably, CRA takes the asset reporting and tries to follow a trail to finding income be-ing reported on the tax return. More specifically, the foreign assets addressed include:

Cash funds outside Canada Indebtedness from non-residents Real property outside Canada*
Other outside Canada Interests in on-resident trusts Shares of non-resident corporations

* Excludes purely personal use foreign recreational property

Until 2012, the form was one page long and the reporting requirements essentially were aggregat-ed for different kinds of investments (shares, real estate, cash, etc) and different ranges of total external holdings (ranging from under $100,000 to over $1M). The related income also had to be reported, but again in one aggregate total.

The new form is two pages long…and theoretically could be even longer. Foreign holdings no longer are reported in aggregate but individually, which could mean, for instance stock-by-stock, and specific information must accompany that line-by-line reporting, including income, capital gain/loss, cost base at end of year and highest cost base at any time in the year! The new form has a relieving (as in Phew!) provision that such line-by-line reporting is excluded for any holdings whose income appears on a Canadian T3 or T5 information slip. This means that the holdings paid interest or dividends in the year. The “un-relieving” aspect of this, unfortunately, is that the only way to deduce that key fact is by reviewing all of the holdings on a brokerage statement and “ticking” the income-paying ones against the T3 or T5 back up information. Even that isn’t sim-ple, because, properly, you need to conduct this test throughout the year’s holdings, not just at year-end!

The new regime also adds extra weight to the penalty for non-compliance. Previously, the penalty for failure to report on a timely basis was $25 per day, to a maximum of $2,500. That remains. However, there is a new, additional punishment for a) not filing on a timely basis or b) filing incorrect information if the related income tax return did not properly include the income from the over-looked or erred item. The new punishment is a bit odd, and potentially draconian. Presently, the CRA’s time limit to uncover “innocent misrepresentations” on a tax return is three years (from the date of the Notice of Assessment). If a T1135 transgression is registered, as above, then that time limit is extended to six years. Lastly, the time extension applies to the taxpayer’s entire affairs on those extra years, not just matters related to the T1135 transgression.

All of this discussion covers the big picture of this new issue. At the drill-down level, there is a myriad of unknowns identified by the tax preparation profession, which promises an “entertaining” first run through in 2014.

As this law ultimately falls upon the taxpayer, we encourage your earnest and diligent attention to helping us help you this Spring.