Reporting Foreign Income Assets
The upcoming April 30th tax filing deadline also marks another important cut-off date. This date is also the deadline for filing the annual T1135 “Foreign Income Verification Statement”. Any individual, corporation, trust or even some partnerships who at any time during the past year owned specified foreign investment property valued at over $100,000 must file this form and the penalties for not filing by this deadline are severe!
So what does this mean and who needs to file this form? Specified foreign property includes (but is not limited to) funds in any foreign bank account, foreign rental property, shares of non-resident corporations, an interest in a non-resident partnership or trust and many other assets. The descriptions of qualifying assets can get quite confusing so here are a few examples of what does or doesn’t qualify:
- If you own a vacation home in Phoenix and use it primarily for personal use, this does not need to be reported on the Foreign Income Statement. However, if you own a similar property in the USA and rent it out 8 months of the year, this would need to be reported if the value is over $100,000. It would not matter if you used the property personally for the other 4 months as it would be considered to be primarily used for investment purposes.
- The rental property issue can become more difficult if the property changes hands. The rules state that you must file for any property valued over $100,000 at any time during that year. If you were to buy a condo in Florida for $80,000 and rent it out each year, it would not initially qualify. If this property is passed on to a family member down the road and the fair market value at that time is over $100,000, it would now need to be reported.
- For those invested in mutual funds administered from a Canadian based company, whether in a trust or corporate class versions, you don’t need to report them. For example – if you had $300,000 in your non-registered investment account with a Canadian mutual fund company and $150,000 of these funds are invested entirely in foreign equity, you would not need to file a form.
- Likewise, if you hold a self directed RRSP (a form of a trust) that is holding over $100,000 of foreign company shares, you would not need to file. However, if you held the same foreign shares in a non-registered account with a Canadian broker, you would be required to file this form. The key here is that if the shares are held in a registered account (RRSP, RRIF, TFSA) you do not need to file but if they are held in a non-registered account, you do.
It’s important to note that you can’t view each asset separately when looking at the $100,000 limit. If you were to own an $80,000 condo used for rental purposes and also hold $30,000 in an account at a US bank, you would be over the $100,000 limit.
As I mentioned above, the fines for late filings are quite severe. Each day that you are late filing Form T1135 costs you $25 up to a maximum of $2,500. If you knowingly fail to file form, the penalty increases to $500 per month up to a 24 month maximum of $12,000. In the past, the CRA has been somewhat lenient enforcing these rules and gave many first time offenders a warning. Recently however, offenders have been receiving these fines on a first time offence.
If these qualification rules apply to you, make sure to file your form before the April 30th deadline and avoid the hefty fines! For those not sure if they qualify, make sure to seek out the opinion of a financial professional right away! A copy of the T1135 and further explanation can be found at: www.cra-arc.gc.ca/E/pbg/tf/t1135/
Please note: the above highlights are a general overview only and neither comprehensive or meant to be used as specific tax advice. Feel free to contact me with further questions or for clarification on this issue.