“Did you own or hold foreign property at any time in the year with a total cost of more than CAN $100,000?”
CRA would like to know.
This question has been on the T1 tax return since 1997 but until recently, didn’t appear important. About three years ago the government began to pay attention to taxpayers’ answers in order to ferret out tax revenue that perhaps it’s missing.
It’s the aggregate value of all the qualifying foreign assets that determines whether or not the $100,000 threshold is exceeded, and if exceeded, the answer is “yes” to the question.
This is not the reporting of income made outside of Canada. Rather, form T1135 requires the disclosure of foreign owned assets, assets that may or may not be earning income.
Such things as funds deposited in foreign bank accounts, shares in foreign companies, interests in foreign trusts, foreign bonds, units in offshore mutual funds, real estate, including vacant land, and in some cases even artwork, jewelry and vehicles.
For cash type investments, the value is determined by the highest value anytime during the year, not on the last day of the year, so moving or removing funds prior to year end cannot be used to prevent the reporting.
For capital assets, the value is based on its original purchase cost plus improvements over time. The inclusion on the T1135 is not determined by the current market value.
Exceptions?
Yes.
Assets to operate a foreign business are exempt, as are personal property type assets strictly used for personal use.
Having said this, if vacation property purchased for more than $100,000 is rented, the Canadian owner must not have an expectation of profit. Rental revenue must only offset expenses associated with that property. Otherwise, the property has to be declared on the T1135.
When it comes to joint ownership of an asset, the value is divided according to each person’s original investment.
So if an asset purchase was $250,000 with equal investment from both purchasers, both would report their $125,000 share on form T1135.
However, if one person had invested $200,000 that person would report $200,000 on form T1135 while the other person wouldn’t have to report their $50,000 investment since it’s under the $100,000.
And being married or living common-law doesn’t automatically split things 50/50. If both partners aren’t listed as owners, the value remains 100 per cent with the listed partner.
For example, if a $150,000 condo is purchased and only one partner is listed as the owner, the condo is reported by that partner. But if both partners are listed as owners, then at $75,000 each, neither partner has to report the condo.
But remember, it’s the total value of all foreign assets.
And if the total value is over $100,000 but less than $250,000, a simplified method of reporting is offered on form T1135 … thankfully.
Finally, form T1135 foreign investment reporting is required not only of individuals, but also corporations.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.