Know Your Foreign Asset/Income Reporting Requirements

Do you have a property in the United States and a bank account in Switzerland? Or maybe you hold shares of Chinese companies in your brokerage account in America. Are you an immigrant with assets in India but now a Canadian resident? There could be multiple reasons for you to have a foreign income or property. Keeping up with globalization, the Canadian tax system requires you to disclose your world income to the Canadian Revenue Agency (CRA), whether taxable or not.

The CRA has Form T1135 – Foreign Income Verification Statement, which is purely a disclosure form and does not calculate your tax liability.

This article will discuss why, when and how to report foreign income and the complications involved.

Why Is It Mandatory to Report Foreign Assets/Income

Individuals, trusts, corporations, and partnerships earning in Canada pay tax in Canada. However, they have to report foreign income. This reporting requirement is mandatory to ensure no income is concealed and global income is taxed. If you are wondering how the CRA will know about your foreign income if you don’t disclose it, Canada collaborates with other nations to exchange taxpayer information to prevent offshore tax evasion and enhance transparency.

When Do You Have to Report Foreign Assets and Income

Which income or asset should you report in Form T1135? The CRA has a defined list of specified foreign property (SFP). If the total cost of these properties exceeds $100,000 at any point during the year, you have to report them through Form T1135. If your SFP cost exceeds the threshold every year, you must disclose these assets each year.

Cost: When calculating the cost of your SFP, you will have to use an adjusted cost base (ACB), which includes the price you paid and additional expenses (brokerage, legal fees and more) incurred to buy the asset. Suppose you purchased shares of a Chinese company for $20,000 and paid a brokerage of $400. Your asset cost will be $20,400.

Calculating the cost of foreign assets could be difficult if you frequently invest or withdraw from your foreign investments, make capital improvements to the real estate, or reinvest dividends. There are more complications in this.

The cost will be their share for SFPs owned jointly by two people.
For SFP received as a gift or inheritance, the cost amount is the fair market value (FMV) on the date of receipt.
For new immigrants, the cost amount is the FMV of the property at the time of immigration.

What Constitutes a Specified Foreign Property

The CRA has a long list of what constitutes specified foreign property (SFP), including foreign bank accounts, foreign mutual funds, interest in a foreign trust, and foreign insurance policies. Precious metals and gold certificates, Futures contracts, and intellectual property (patents and copyrights) held outside Canada are also SFPs. Then there are loans to non-residents, bonds and debentures from foreign entities, and interest in a partnership holding SFPs.

All these assets generate passive income or passive value to the recipient. Shares and real estate property are also part of SFP, but their classification is complicated.

Shares: The definition of foreign gets complicated. The location of the company whose shares you own and that of the brokerage where they are held matters, but the location of a stock exchange doesn’t.

Shares in foreign companies are SFPs even if they are listed on the Canadian stock exchange or you hold them in a Canadian brokerage or through a separately managed account (SMA).
Shares of Canadian corporations are SFPs if held in a foreign brokerage account. However, they are not SFPs if traded on a foreign exchange but held in a Canadian brokerage.

You can consider converting these SFPs into Canadian property by moving shares of Canadian corporations into Canadian brokerage accounts. You could also consider purchasing Canadian ETFs and mutual funds with foreign company shares as the underlying asset.

Real estate: If you own real estate outside Canada, it constitutes an SFP. But if it is for personal use (principal residence or vacation home), it is not an SFP.

Remember, the asset should generate passive income or value. Hence, property used for active business, shares, and debentures of a foreign company affiliated with your Canadian business is not an SFP. Such assets are involved in active income.

How To Report Your Foreign Asset/Income

Once you have sorted out your assets as SFP and non-SFP and calculated the cost, it is time to report them in Form T1135. Apart from your Social Insurance Number and other personal details, you have to mention the following information about each SFP:

Maximum funds held
Cost of each asset during the tax year
The country held: A foreign company’s shares will be tagged under the corporation’s country of residence, irrespective of the stock exchange they trade on. So, if you own shares of a German company trading in the US exchange, you will add Germany’s country code.
Income gained or lost from each asset includes interest, dividend, and capital gain/loss from the sale of property after deducting expenses related to this income.

Form T1135 has two parts:

Part A (Simplified reporting method):

If your SFP cost is below $250,000 throughout the tax year, you need not provide details for each property. Just tick the boxes for the type of property and the top three countries where the majority of your SFP by maximum cost is held.

Part B (Detailed reporting method):

If your SFP cost is greater than $250,000 at any time during the year, you have to give details of each property, including:

Description of the foreign property
Name of the foreign entity, corporation or trust holding the funds or assets
The country where the foreign asset is located
Maximum cost amount of each property during the year and the cost amount at the end of the year.
Income and capital gain or loss realized from the SFP during the year.

You also have to keep the supporting documents of the above SFPs, such as statements of banks, brokerages, and real estate holdings that give details of the fair market value, income and capital gain/loss from asset sale.

Penalties For Non-Compliance, Errors and Omissions

The CRA requires filing a T1135 form with your income tax returns.

Failure to report your foreign income can attract a minimum penalty of $100 and $25 for each day of delay up to a maximum of $2,500. So, if you delay filing by three days, you will have to pay a penalty of $100. If you delay it by ten days, the penalty will be $250 ($25 x 10 days).
If you delay filing by 24 months, an additional penalty of 5% of the property’s cost could be levied.
If the information is inaccurate or incomplete, you will face a penalty greater than $100 or 50% of the understated tax.

The above three instances could also extend the three-year CRA reassessment period. And you don’t want the CRA digging into your accounts for a long time.

Contact Ford Keast LLP in London to Help You Report Foreign Asset/Income

A professional accountant can help you with complex asset calculations and file your foreign assets accurately and promptly. To learn more about how Ford Keast LLP can provide you with the best accounting and tax filing expertise, contact us online or call us at 519-679-9330.