Foreign Property Reporting

by Alina V. Nikolaeva

Canadians must provide informational returns to Canada Revenue Agency (“CRA”) about their out of country assets that are “specified foreign property” and have cost over $100,000.  There are four forms to be used to report such assets:

T1134 – Information Return Relating to Controlled and Not-Controlled Foreign Affiliates;

• T1135 – Foreign Income Verification Statement;
• T1141 – Information Return in Respect of Contributions to Non-Resident Trusts, Arrangements or Entities; and
• T1142 – Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust

Majority of reporting taxpayers will be filling out Form T1135, Foreign Income Verification Statement.  It must be filed by a reporting entity, which for a taxation year means a specified Canadian entity that is (with certain exceptions discussed below):

• Canadian resident individuals, corporations, and certain trusts that, at any time during the year, own specified foreign property costing more than $100,000; and
• Certain partnerships that hold more than $100,000 of specified foreign property.

The form must be filed in a year when a reporting taxpayer owns the property with the cost over $100,000 at any time during the year, even if the property is sold before year end.  Specified foreign property includes property that does not produce income.  If the form is not filed or filed late, CRA may assess failure to file or late filing penalties.  The penalties will be assessed even if there was no income and no income taxes are due.  The penalties originally calculated based on a fixed amount per day, in an event of negligence or repeated failure to file or late filing, the penalty may be calculated as a percentage of the value of the foreign property subject to reporting.  More about penalties will be in the next post.

It should also be kept in mind that Canadian resident taxpayers must report and include in their income for Canadian tax purposes all the income they earn from foreign property, regardless of the cost amount of the foreign property.  If the cost amount of the taxpayer’s foreign property exceeds $100,000, the taxpayer must also file Form T1135.  The $100,000 threshold means that many Canadians do not need to comply with the reporting requirements of Form T1135, but this does not exempt them from paying tax on any income earned on such property.

Specified foreign property is defined in subsection 233.3(1) of the Income Tax Act (“ITA”) and includes:

• funds or intangible property (patents, copyrights, etc.) situated, deposited or held outside Canada;
• tangible property situated outside Canada;
• a share of the capital stock of a non-resident corporation;
• shares of corporations resident in Canada held outside Canada;
• an interest in a non-resident trust that was acquired for consideration;
• an interest in a partnership that holds a specified foreign property unless the partnership is required to file Form T1135;
• a property that is convertible into, exchangeable for, or confers a right to acquire a property that is specified foreign property;
• a debt owed by a non-resident, including government and corporate bonds, debentures, mortgages, and notes receivable;
• an interest in a foreign insurance policy;
• precious metals, gold certificates, and futures contracts held outside Canada.

Specified foreign property does NOT include:

• a property used or held exclusively in carrying on an active business;
• a share of the capital stock or indebtedness of a foreign affiliate;
• an interest in a trust described in paragraph (a) or (b) of the definition of exempt trust in subsection 233.2(1);
• a personal-use property and listed personal property as defined in section 54;
• an interest in, or a right to acquire, any of the above-noted excluded foreign property.

The threshold amount of $100,000 is usually the adjusted cost base of the property.  In the event of a gift, bequest or inheritance, the adjusted cost base of the recipient is the property’s fair market value at the time of transfer.

Personal-use property is generally a property owned by the taxpayer that he or she or a related party uses primarily for personal and enjoyment purposes. The CRA takes the view that “primarily” means more than 50%.   Personal-use property is defined in section 54 of the ITA and includes:

• property owned by the taxpayer that is used primarily for the personal use or enjoyment of the taxpayer or for the personal use or enjoyment of one or more individuals each of whom is:
  • the taxpayer,
  • a person related to the taxpayer, or
  • where the taxpayer is a trust, a beneficiary under the trust or any person related to the beneficiary,
• any debt owing to the taxpayer in respect of the disposition of property that was the taxpayer’s personal-use property, and
• any property of the taxpayer that is an option to acquire property that would, if the taxpayer acquired it, be personal-use property of the taxpayer,

and

• personal-use property of a partnership includes any partnership property that is used primarily for the personal use or enjoyment of any member of the partnership or for the personal use or enjoyment of one or more individuals each of whom is a member of the partnership or a person related to such a member.

Listed personal property is also defined in section 54 and includes works of art, jewelry, rare folios, rare manuscripts, rare books, stamps, and coins.

As mentioned before, an entity that is a specified Canadian entity must file the report.  A specified Canadian entity for a taxation year or fiscal period means:

• a taxpayer resident in Canada in the year that is NOT:
• a mutual fund corporation;
• a non-resident-owned investment corporation;
• a person (other than a trust) all of whose taxable income for the year is exempt from tax under Part I;
• a trust all of the taxable income of which for the year is exempt from tax under Part I;
• a mutual fund trust,
• a trust described in any of paragraphs (a) to (e.1) of the definition trust in subsection 108(1);
• a registered investment, nor
• a trust in which all persons beneficially interested are persons described in subparagraphs (i) to (vii); and
• a partnership (other than a partnership all the members of which are taxpayers referred to as any of the above) where the total of all amounts, each of which is a share of the partnership’s income or loss for the period of a non-resident member, is less than 90% of the income or loss of the partnership for the period, and, where the income and loss of the partnership are nil for the period, the income of the partnership for the period is deemed to be $1,000,000 for the purpose of determining a member’s share of the partnership’s income for the purpose of this paragraph.

If an individual personally receives shares of a non-resident corporation with cost over $100,000, s/he will have to file form T1135 to report this asset. An individual does not have to file Form T1135 for the tax year in which he or she first became resident in Canada.  For a new resident, the cost amount of foreign property is its fair market value at the time he or she first became resident in Canada. Use this fair market value in determining the new resident’s Form T1135 filing requirement in future years.

Canadian corporation is a specified Canadian entity and will have to file T1135 if it holds shares of a non-resident corporation with cost over $100,000, similar to Canadian resident individuals.

If the shares of a non-resident corporation are held by a partnership, this partnership will have to file a Form T1135 if it is a specified Canadian entity and, at any time during the reporting period, the total cost amount of all specified foreign property it held was more than $100,000.  A partnership will be a specified Canadian entity where the total of all amounts, each of which is the income (or loss) attributable to non-resident partners, is less than 90% of the partnership’s total income (or loss).  That means Canadian partner is allocated over 10% of the income or loss of the partnership.

If a Canadian resident taxpayer holds an interest in a partnership that is a specified Canadian entity, the taxpayer is not required to report their interest in the partnership on Form T1135.  This partnership will be reporting on the foreign assets instead.

If a Canadian resident taxpayer holds an interest in a partnership that is not a specified Canadian entity, a taxpayer is required to report their interest in the partnership on Form T1135 if the partnership holds specified foreign property.