The purpose of this post …
This is the second of my posts about Canada’s foreign asset reporting requirements. The first post introduced Canada’s Foreign Asset Reporting Requirements. This post will focus specificlly on Form T1135 as it applies to individuals. Individuals are disadvantaged because they may or may not use professional tax advisers. Form T1135 is a “compliance trap” and can lead to serious penalties for inadvertent noncompliance. (The case of Takenaka v AGC, 2018 FC 347 will be of great interest to U.S. citizens moving to Canada who retain their home in the United States. Ditto for certain U.S. life insurance policies.)
This post is for the purpose of helping individuals understand Form T1135 and the reporting obligations it implies. Obviously this is general discussion and not advice specific to your situation. Form T1135 reporting requirements are surprisingly complex. The Canada Revenue Agency is surprisingly unforgiving for “foot faults” in relation to this form.
Part A: Parsing the language – what is the basic Form T1135 reporting requirement?
If you want to understand the law it’s a good idea to begin with reading the law (make a note of that point). In this case the text of the law is found in Section 233.3 of the Income Tax Act of Canada (a not particularly obscure statute).
This post will guide you through the statute. Please note that all words in italics (whether bolded or not) are my personal commentary/explanation.
Here we go …
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
1. You as an individual ARE 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)
2. Three points:
– it applies to “tax residents” of Canada (watch out – you need NOT spend 183 days in Canada to be a “tax resident”)
– the total COST AMOUNT of SPECIFIED FOREIGN PROPERTY (not value but COST – “The cost amount is defined in subsection 248(1) of the Income Tax Act and generally is the adjusted cost base and not the fair market value.“)
– the cost must exceed $100,000 CDN
specified Canadian entity for a taxation year or fiscal period means
3. This lists those “taxpayers resident in Canada” who are NOT “specified Canadian entities (they are safe)
(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
4. Partnerships: How they qualify for the fun
(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)
5. Okay here comes the definition of “specified foreign property”
specified foreign property of a person or partnership means any property of the person or the partnership that is
(a) funds or intangible property (patents, copyrights, trademarks), or for civil law incorporeal property, situated, deposited or held outside Canada, (offshore anyone?)
(b) tangible property, or for civil law corporeal property, situated outside Canada, (offshore anyone?)
(c) a share of the capital stock of a non-resident corporation, (even if held in a Canadian brokerage account)
(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,
6. But the following is NOT “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, (don’t worry there are special reporting requirements here)
(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, (don’t worry there are special reporting requirements here)
(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, (interesting – does this mean that an inherited interest is excluded?)
(n) an interest in a trust described in paragraph (a) or (b) of the definition exempt trust in subsection 233.2(1), (Specified foreign property held in an RRSP or a TFSA is excluded from Form T1135 reporting requirements.)
(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, (a Florida condo perhaps?) 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.
7. When is the reporting deadline?
Marginal note: Returns respecting foreign property (It’s due the same day your tax return is due but is required even if you are not required to file a tax return)
(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
Part B: Summary – The Bottom Line …
Q. What then is the “basic reporting requirement”?
A. It means that:
– individuals who are tax residents of Canada
– who (at ANY time of the year)
– owned specified foreign property
– that has a total cost basis of $100,000 CDN or more
– are required to report.
Note that neither personal use property nor property used to carry on an active business counts as specified foreign financial assets.
Q. What about the $100,000 CDN cost basis? What does it mean and how do exchange rates matter?
A. Foreign property is NOT generally purchased in Canadian dollars. First, we must determine the cost amount in foreign currency. Second, we need to convert that foreign currency to Canadian dollars.
Therefore, we need to understand (how the exchange rates determine cost basis and values. We use the rules in Section 248(1) to determine the cost basis.
The following excerpts from the instructions to Form T1135 are of assistance:
Cost amount/Maximum cost amount
Cost amount is defined in subsection 248(1) of the Act and generally would be the acquisition cost of the property. If you immigrate to Canada, the cost amount is the fair market value of the property at the time of immigration. Similarly, if you received specified foreign property as a gift, or inheritance,
the cost amount is its fair market value at the time of the gift or inheritance. The maximum cost amount during the year can be based on the maximum month-end cost amount during the year.
Foreign currency conversion
The amounts to be reported on Form T1135 should be determined in the foreign currency then translated into Canadian dollars. Generally, when converting amounts from a foreign currency into Canadian dollars, use the exchange rate in effect at the time of the transaction (i.e. the time the income was received or the property was purchased). If you received income throughout the year, an average rate for the year is acceptable.
The following summarizes how other amounts of the form should be translated:
• Maximum funds held during the year – the average exchange rate for
• Funds held at year end – the exchange rate at the end of the year.
• Maximum fair market value during the year – the average exchange rate
for the year.
• Fair market value at year end – the exchange rate at the end of the year.
Q. When is the reporting deadline?
A. The Form T1135 filing deadline is the same as the deadline for the tax return.
Canada Form T1135 Filing deadlines … The deadline is the same as the tax return deadline would be. But, remember that the T1135 is required regardless of whether a Canadian tax return is filed. https://t.co/JZtXCuAWel pic.twitter.com/4mlryV71Hc
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) July 14, 2019
Part C: Where Are The Guidelines From The Canada Revenue Agency?
Now that you understand the “Basic Reporting Requirement”, the Canada Revenue Agency Form T1135 guidelines will make more sense.
This concludes the second post. In the third post we will analyse Form T1135 itself.
John Richardson – Follow me on Twitter at @ExpatriationLaw