Wednesday, May 6, 2015

Reporting Ownership of Foreign Assets

When filing income tax returns, Canadians have to indicate whether they own foreign assets that had an aggregate cost of more than $100,000 (measured in Canadian currency) at any time during the taxation year.  If they do, details of the foreign assets must be provided on Form T1135.  This is the case even if the foreign assets are held inside a Canadian brokerage account and even if the foreign assets did not produce any income that year.  Specific exceptions apply for specific types of foreign assets, such as a foreign vacation home that is used only for personal purposes (in other words, that is not rented out to others at any point in the year).

This is a complicated filing requirement that has caught many Canadians who were unaware of the breadth of the reporting requirement.  After all, the question arises on an income tax return, not a wealth tax return.

The Canada Revenue Agency (the CRA) revised Form T1135 in 2013.  The revised form requires much more detailed information about foreign assets, increasing even further the compliance burden.  In some cases, the cost of compliance is out of all proportion to the value of the foreign assets.

The 2015 Budget proposes to simplify the foreign asset reporting system for taxation years that begin after 2014.  These new rules will not apply for 2014 returns but will apply for returns that cover the 2015 taxation year.

The simplification will retain the CAD $100,000 aggregate cost threshold.  If the total cost of reportable foreign assets is less than CAD $250,000 throughout the year, the taxpayer will be able to report these assets under a more simplified system.  Details of the simplified system have not yet been released.

It does not look as if the proposed streamlining will eliminate the need to report foreign investments that are held in a Canadian brokerage account and in respect of which the broker issues information slips reporting the income received.  That type of streamlining would require a statutory amendment rather than just changes to Form T1135.

If you have failed to report all foreign assets in the past, you may be able to avoid penalties by voluntarily disclosing the failure to the CRA.  In order to avoid penalties, you must approach the CRA before the CRA approaches you.  Generally, voluntary disclosures (also called tax amnesties by some advisers) are initiated on a no-names basis through a law firm so that you do not have to disclose your name until you have an idea of what the CRA will require in order to correct the past omission.

If you need advice about the voluntary disclosure program or believe that you may need to make a disclosure, please contact Layli Antinuk at 250-360-2110.  Any conversations will be protected by lawyer-client privilege.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.