T1135 Filings: Much More Expensive for Clients
Canadian taxpayers have reporting obligations pursuant to section
233.3 if, at any time in the year, the total cost amount of all
specified foreign property held exceeds $100,000. These reporting
obligations are set out in form T1135, "Foreign Income Verification
Statement," for which a revised version requiring additional information
is applicable to taxation years ending on or after July 1, 2013. The
scope of these additional requirements is known to be broad, but is in a
confusing state that is only gradually being clarified.
The new form requires that for each separate property, the taxpayer
must state the country code, the maximum cost amount in the year, the
cost amount at year-end, and the income reported in the year. As
detailed below, this requirement significantly increases the compliance
burden, including tax practitioners' fees: previously, the only specific
number required was the total income from all property. In some
circumstances, the cost to clients of preparing the T1135 form may
exceed all other costs of preparing the T1 return.
Some relief is available to corporate taxpayers who have made the functional
currency election; they will now report the relevant cost amount and
income numbers in that currency (which is presumably easier for them to
do). Also, when income from specified foreign property has been reported
on a T3 or T5 from a Canadian issuer, taxpayers are exempt from
reporting specific information for that property on the T1135.
The T3/T5 exemption has some quirks. Suppose that the taxpayer has
specified foreign property with a total cost amount of $120,000, and
that T3s and T5s have been issued in respect of all but $50,000 of this
amount. One might hope that because the $50,000 is less than the
$100,000 threshold, no T1135 form would be required; however, the CRA
has stated that the form must still be filed in this situation, and
detailed information must be provided with respect to the property with
the $50,000 cost amount. In the extreme, if all property meets the
exemption, an almost-blank form would have to be filed. Also, note that
the exemption is limited to T3s and T5s from a Canadian issuer. If, for
example, a taxpayer uses the foreign-based brokerage eTrade, and eTrade
complies with regulation 201 and issues the required tax slip, detailed
reporting is still required. Finally, the wording of the form implies
that a T3 or T5 showing zero income likely would qualify the associated
property for a reporting exemption; whether the CRA would accept this
practice is not yet known. Although such slips are not commonly issued
by reporting bodies (and might require significant software changes to
implement), this practice would be welcomed by tax practitioners.
Otherwise, a foreign property might be exempt from detailed disclosure
in one year because there was a positive income, but it would have to be
reported in detail in another year in which there was no income. The
same alternating pattern of required disclosure may also occur if in a
year a tax slip was not required to be issued because in the case of a
T5, for example, less than $50 of income was earned in the year; a
reporting body could establish a system that captured the account
holder's consent to issue a slip in that situation.
The new reporting requirements raise a number of compliance difficulties and unanswered questions.
What level of disaggregation is required for each category of
property? For example, if a taxpayer owns a rental property, must it
divide the cost amount among the land, building, furniture, and
How is the country code determined? For example, if the taxpayer
owns shares of a corporation, is the relevant country the one in which
the corporation is incorporated, or does the location of its mind and
management also have to be considered? The latter information might not
be publicly available.
Does the maximum cost amount during the year take into account
variations in the exchange rate as well as variations in the value of
the asset in the foreign currency? The maximum cost amount in Canadian
dollars may be at a different point of the year than the maximum cost
amount in the foreign currency.
Determining the maximum cost amount during the year of a
partnership interest will be difficult; the taxpayer will have to
compute the partnership ACB throughout the year.
If a taxpayer is reporting foreign property on form T1135 but the
income from such property is attributed to another taxpayer (for
example, a spouse), must the taxpayer still include the income amount on
The form continues (for now) to require paper filing, so some tax
practitioners using e-filing (or taxpayers using netfiling) may be
inadvertently failing to file the forms. The voluntary disclosure
program may be an appropriate option if compliance has been faulty.
Failure to file the form, or filing a form with incorrect or missing
information, may result in penalties under subsection 162(7). The fine
is generally $25 per day, to a maximum of $2,500 (plus interest). A
taxpayer who misses more than one year of filings could be subject to
multiple $2,500 penalties. The CRA has not been reluctant to apply this
penalty in the past, although the penalty was overturned in the case of
one non-wealthy taxpayer (Douglas v. The Queen, 2012 TCC 73).
The 2013 federal budget proposes to extend the normal reassessment
period when the form is not filed in a timely manner and income from
specified foreign property is not reported on the taxpayer's tax return
(see proposed paragraph 152(4)(b.2) in Bill C-4, introduced on October
22, 2013). The need for the penalties under subsection 162(7) appears to
be reduced by this amendment, but there has been no indication that the
CRA will become more lenient in its application of the penalty.
In light of the size of these penalties, taxpayers may blame tax
practitioners who have prepared the returns for any failure to comply.
To avoid having to pay the penalties just to maintain client goodwill,
it may be prudent for practitioners to obtain written assurance from
clients that all information regarding their foreign property is
complete and accurate.
Collins Barrow Durham LLP