Last week I received a call from one of the many Americans abroad living (not hiding out) in Canada. He did NOT know about his U.S. tax obligations. Therefore, he has not been filing U.S. taxes. Interestingly, he had a portfolio of U.S. stocks (foreign to Canada) which were providing him with a consistent dividend stream. He (naturally) had been reporting all of the these “U.S. dividends” on his Canadian tax return. He had never heard of Form T1135 and the requirement that he report certain “foreign assets” to the Canada Revenue Agency.
Looks like he may have been headed for “double trouble”.
Form Crimes: They’re not for everybody – but they could be for you!
I’ve been told, but I don’t know, that single citizenship Canadians are sometimes jealous of dual U.S./Canada citizens. Those dual U.S./Canada citizens living in Canada, are sometimes thought to have more opportunities than “pure Canadians”. With all the media attention on the United States imposing worldwide taxation on (U.S. citizen) Canadian residents, many Canadians pay more attention to how the U.S. tax system affects them, than on how Canada’s tax system affects them. “Pure Canadians” are often in awe of the “form related” penalties to which their dual citizen neighbours are subject. Think of it: A U.S. citizen in Canada can be fined hundreds of thousands of dollars for failing to report – to U.S. financial crimes with on the FBAR – his local Canadian bank account. But, Mr. FBAR affords dual citizens living in Canada just one of many opportunities for penalties.
As an example of more …
Q. What if a dual citizen fails to report his ownership interest in a small Canadian corporation?
A. A $10,000 automatic penalty (is the penalty indexed to inflation?) penalty.
(Form 5471 is how Americans effectvely enrolled in the TCJA Section 965 Transition Tax and Section 951A GILTI programs.)
Yes, these penalties are for failing to comply with the extensive battery of U.S. reporting requirements – AKA “Form Crimes”. Although some commentators call these reporting requirements “trivial”, Gary Carter, in a post at Tax Connections, has exposed these penalties as the dangers they are, to those American abroad who attempt the Sysphean task of complying with the U.S. tax system.
Bottom Line: To be an American citizen living outside the United States is to live under constant threat of penalty (and considering the Section 965 Transition tax) asset confiscation. As previously reported at Tax Connections, Americans abroad live life in the penalty box.
Irrational as it may be, many Canadians wonder:
As a Canadian citizen, who is a tax resident of Canada, am I not eligible for penalties too? Why should dual Canada U.S. citizens have all the penalty exposure?
I am happy to report that the Canadian tax system has penalties for you too! (And, lest any dual U.S./Canada citizen living in Canada think that these penalties are ONLY for single citizen Canadians, well you are subject to these penalties too.) Yes, although not as well known or understood, you have NOT been left out. Yes, you can be subjected to significant (but not as significant as what U.S. citizens are eligible for) penalties for failing to report your “foreign” interactions/circumstances.
This is the first of a series of posts to explain how you as a Canadian only, who is a “tax resident of Canada”, can be penalised for reporting violations!
Let’s get started …
The Income Tax Act of Canada – Where are the reporting requirements and what are you required to report?
The reporting requirements are in found in PART XV (Administration and Enforcement) under the “General” provisions beginning with Section 230. You will find the specific requirements in Section 233 – beginning with Section 233.1.
Information Returns – Requiring a Tax Resident of Canada to report transactions with a foreign party or an interest in foreign property
What are the requirements for foreign property/interaction reporting for tax residents Canada?
The Five Basic Rules (as explained at TaxPage.com) Found In The Income Tax Act of Canada are:
Section 233.1 requires a Canadian resident to file a T106 if the resident entered a business transaction with a related non-resident.
Section 233.2 requires a Canadian resident to file a T1141 if the resident transferred or loaned property to a non-resident trust or similar entity.”
Section 233.3 Section 233.3 requires a Canadian resident to file a T1135 if the resident owns or has an interest in “specified foreign property”
Section 233.4 requires a Canadian resident to file a T1134 if the resident has a “foreign affiliate.”
Section 233.6 requires a Canadian resident to file a T1142 if the resident is a beneficiary of—and receives a distribution from—a non-resident trust.
Achtung!! Achtung!! These reporting rules do not require tax liability or an obligation to file a tax return. These rules obligate a tax resident of Canada to report a foreign interest regardless of whether that interest generates income that is taxable in Canada!!
These rules (what do you expect) are complex (and as the recent judgement in the Moore case suggests) – not well communicated. This the first of a series of posts discussing these requirements.
This first post will begin a discussion of Form T115 (a wonderful opportunity for Canadians with foreign assets to be penalized).
Tax Residents of Canada Who Own Interests In Specified Foreign Property – Section 233.3 – Form T115
I have included the legislative text of Section 233.3* at the bottom of this post. It’s important to read. It is the legislation that mandates the creation of Form T115. But, let’s go straight to the “nuts and bolts” and see how the Canada Revenue Agency interprets the law.
Form T1135 – Specified Foreign Property With A Cost Base Of Greater Than $100,000.00 CDN
The purpose of the “foreign property” reporting requirements is to require the reporting of foreign assets that may generate taxable income. Interestingly, the reporting of assets that are for personal use is NOT required. Unlike the U.S. FBAR or Form 8938, the reporting of interest in real estate (to the extent that it is NOT personal use property) is required.
Questions and answers about the reporting requirements are here.
Click here to see what Form T1135 looks like.
Certain penalties apply for failing to file Form T1135 by the reporting deadline and for making a false statement or omission about the required information. For more information, go to Table of penalties.
Relief can be granted from these penalties under the taxpayer relief provisions upon written request from the taxpayer. Each request is considered on its own merit and circumstances. See the Request for Taxpayer Relief form.
Note that the written request will be in the “form” (no pun intended) of a voluntary disclosure.
The second post in this series will continue the discussion of Form T1135
John Richardson – Follow me on Twitter @ExpatriationLaw
*233.3 (1) The definitions in this subsection apply in this section.
reporting entity for a taxation year or fiscal period means a specified Canadian entity
for the year or period where, at any time (other than a time when the entity is non-resident) in the year or period, the total of all amounts each of which is the cost amount to the entity of a specified foreign property of the entity exceeds $100,000. (déclarant)
specified Canadian entity for a taxation year or fiscal period means
(a) a taxpayer resident in Canada in the year that is not
(i) a mutual fund corporation,
(ii) a non-resident-owned investment corporation,
(iii) a person (other than a trust) all of whose taxable income for the year is exempt from tax under Part I,
(iv) a trust all of the taxable income of which for the year is exempt from tax under Part I,
(v) a mutual fund trust,
(vi) a trust described in any of paragraphs (a) to (e.1) of the definition trust in subsection 108(1),
(vii) a registered investment, nor
(viii) a trust in which all persons beneficially interested are persons described in subparagraphs (i) to (vii); and
(b) a partnership (other than a partnership all the members of which are taxpayers referred to in any of subparagraphs i) to (viii)) where the total of all amounts, each of which is a share of the partnership’s income or loss for the period of a non-resident member, is less than 90% of the income or loss of the partnership for the period, and, where the income and loss of the partnership are nil for the period, the income of the partnership for the period is deemed to be $1,000,000 for the purpose of determining a member’s share of the partnership’s income for the purpose of this paragraph. (entité canadienne déterminée)
specified foreign property of a person or partnership means any property of the person or the partnership that is
(a) funds or intangible property, or for civil law incorporeal property, situated, deposited or held outside Canada,
(b) tangible property, or for civil law corporeal property, situated outside Canada,
(c) a share of the capital stock of a non-resident corporation,
(d) an interest in a non-resident trust,
(e) an interest in a partnership that owns or holds specified foreign property,
(f) an interest in, or right with respect to, an entity that is non-resident,
(g) indebtedness owed by a non-resident person,
(h) an interest in, or for civil law a right in, or a right — under a contract in equity or otherwise either immediately or in the future and either absolutely or contingently — to, any property (other than any property owned by a corporation or trust that is not the person) that is specified foreign property, and
(i) property that, under the terms or conditions thereof or any agreement relating thereto, is convertible into, is exchangeable for or confers a right to acquire, property that is specified foreign property,
but does not include
(j) property that is used or held exclusively in the course of carrying on an active business of the person or partnership (determined as if the person or partnership were a corporation resident in Canada),
(k) a share of the capital stock or indebtedness of a non-resident corporation that is a foreign affiliate of the person or partnership for the purpose of section 233.4,
(l) an interest in, or indebtedness of, a non-resident trust that is a foreign affiliate of the person or partnership for the purpose of section 233.4,
(m) an interest in a non-resident trust that was not acquired for consideration by either the person or partnership or a person related to the person or partnership,
(n) an interest in a trust described in paragraph (a) or (b) of the definition exempt trust in subsection 233.2(1),
(o) an interest in a partnership that is a specified Canadian entity,
(o.1) a right with respect to, or indebtedness of, an authorized foreign bank that is issued by, and payable or otherwise enforceable at, a branch in Canada of the bank,
(p) personal-use property of the person or partnership, and
(q) an interest in, or for civil law a right in, or a right to acquire, a property that is described in any of paragraphs (j) to (p). (bien étranger déterminé)
Marginal note:Application to members of partnerships
(2) For the purpose of this section, a person who is a member of a partnership that is a member of another partnership
(a) is deemed to be a member of the other partnership; and
(b) the person’s share of the income or loss of the other partnership is deemed to be equal to the amount of that income or loss to which the person is directly or indirectly entitled.
Marginal note:Returns respecting foreign property
(3) A reporting entity for a taxation year or fiscal period shall file with the Minister for the year or period a return in prescribed form on or before the day that is
(a) where the entity is a partnership, the day on or before which a return is required by section 229 of the Income Tax Regulations to be filed in respect of the fiscal period of the partnership or would be required to be so filed if that section applied to the partnership; and
(b) where the entity is not a partnership, the entity’s filing-due date for the year.
[NOTE: Application provisions are not included in the consolidated text see relevant amending Acts and regulations.] 1997, c. 25, s. 69 2001, c. 17, s. 184 2013, c. 34, ss. 22, 166
Marginal note:Reporting entity