One of Canada’s greatest strengths is its rich multiculturalism. People come to Canada from all over the world looking to make a new home for themselves and their families. Even with successful immigration to Canada, many families maintain foreign bank accounts and/or investments abroad.
The Canadian tax laws are written in such a way that any individual resident in Canada is supposed to calculate their Canadian income taxes based on their worldwide income. Residency can be a complicated issue, and is outside the scope of this article, but assuming that a person (or company) is a Canadian resident for tax purposes, they are required to disclose their worldwide income to the Canada Revenue Agency (CRA) each year in their income tax filings.
Further, the law requires that anyone with assets (some personal use assets do not qualify for reporting) outside of Canada worth more than $100,000 CAD must disclose those assets along with their income tax return, even if no additional taxes are due.
New legislation that came into effect in December of 2016 gives the CRA much more visibility into the foreign holdings of Canadian residents. Included in the 2016 federal Budget was Bill C-29 which proposed new sections for the Income Tax Act, enabling the sharing of financial information with foreign governments.
As a member of the Organisation for Economic Cooperation and Development (OECD), Canada has agreed to the exchange of financial information with member countries. To comply with the new laws, Canadian financial institutions will be required to disclose any holdings in Canada held by a resident of another member nation. Likewise, the CRA will automatically receive notification of any significant investments held outside Canada by Canadian residents.
For people who hold investments offshore, these changes to foreign income reporting makes the disclosure to CRA much more important than in past years (see penalties below). The CRA’s form T1135 Foreign Income Verification Statement is required for anyone holding “significant” investments, defined as costing more than $100,000 CAD during the taxation year. While there are no additional taxes on these investments, it’s the financial information the CRA is after.
Once a person or company is obligated to complete the T1135 form, there are two methods available to choose from; simplified and detailed. Assuming total foreign investments cost less than $250,000 during the year, the simplified method may be used which is far less onerous. If the cost basis exceeds the $250,000 threshold, then detailed accounting of the taxpayer’s foreign investments by country is required (including type of investment, maximum reported amount during the year, reported amount at the end of the year and income reported for that investment).
Anyone who has not reported T1135 forms when they were supposed to, now has an increased likelihood of being caught by the CRA. Penalties for not reporting start at $25 per day to a maximum of $2,500 per year. Taxpayers who are worried about catching up should consider using the Voluntary Disclosure Program (VDP) which offers taxpayers a second chance to correct their tax filings by minimizing or eliminating the application of interest and penalties. Given that the CRA will have access to more foreign investment holdings information, taxpayers who are behind are strongly urged to use VDP to catch up. Our firm has prepared many T1135 forms as well as helped clients catch up through VDP. That being said, feel free to give our firm a call to help with this process.
This blog was written by Derek Edelkoort CPA, CGA