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Tax Tips & Pits: Disclosure of foreign assets

T1135 requires disclosure of foreign owned assets, whether those assets are earning income or not

by Ron Clarke

Did you own or hold foreign property at any time in the year with a total cost of more than CAN $100,000?”

If you did, Canada Revenue Agency (CRA) would like to know.

And this is about assets, not employment income earned outside of Canada.

This question has been on the T1 tax return since 1997, but until recently, not much attention has been paid to it by CRA. However, over the past five years, it has become more and more important to CRA as it attempts to ferret out tax revenue that is not being reported.

The $100,000 figure is defined by the aggregate value of all the qualifying foreign assets held by a taxpayer and if exceeded, the answer is “yes” to the question, then Schedule T1135 must be completed.

The T1135 requires the disclosure of foreign owned assets, whether those assets are earning income or not.

This includes funds deposited in foreign bank accounts, shares in foreign companies, interests in foreign trusts, foreign bonds, and units in offshore mutual funds.

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 removing funds prior to year end cannot be used to prevent the reporting on the T1135.

Also to be reported is real estate, including vacant land, and in some cases even artwork, jewelry and vehicles.

For capital assets, the value is based on its original purchase cost plus improvements over time. The current market value of the asset is irrelevant in the determination of its inclusion on the T1135.

To speak to the significance of foreign asset reporting, in 2017 an international accord was signed agreeing to the automatic financial information exchange between counties to reduce tax evasion.

Each participating country requires all their domestic financial institutions to collect financial asset information held by residents of foreign countries.

This detail is then reported to their domestic tax authority, and in turn this detail is exchanged with the tax authorities of the participating countries, such as CRA. No request needed, this is now a matter of international routine for over 100 countries, Canada being one.

There are exceptions to what has to be reported on the T1135.

Assets to operate a foreign business are exempt, as are personal property type assets strictly used for personal use.

To this last item, 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, as does the rental revenue generated.

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 the T1135.

However, if one person had invested $200,000 that person would report $200,000 on the T1135 while the other person would not have to report their $50,000 investment since it’s under the $100,000, assuming they have no other foreign assets.

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.

If you have $100,000 but less than $250,000 of foreign assets to be reported on the T1135, CRA does have a simplified method of reporting.

If over $250,000, much more detail must be reported.

Finally, T1135 foreign investment reporting is required not only of individuals, but also corporations.

The penalty for late filing is $25/day to a maximum of $2,500.

Ron Clarke, owner of JBS Business Services in Trail, provides accounting and tax services.