As I am preparing my income taxes, I am reminded yet again of the trap that the Canada Revenue Agency has set for taxpayers in the T1 General form with this innocuous question:

“Did you own or hold foreign property at any time in 2011 with a total cost of more than CAN$100,000? (See “Foreign Income” in help for details)”

An unsuspecting taxpayer might reasonably infer “foreign property” to mean a condominium in Florida or a not-so-secret-these-days Swiss bank account and owning nothing of the kind might answer “No” to the question. The General Income Tax and Benefit Guide put out by the CRA does not shed much light on the question either.

To find out the details of what constitutes “specified foreign property” in CRA’s eyes, one has to turn to the information provided in Form T1135 Foreign Income Verification Statement. In it, CRA defines “shares of non-resident corporations held by the resident filer or on deposit with a Canadian or foreign broker” and “interests in mutual funds that are organized in a foreign jurisdiction” as specified foreign property. In other words, if our taxpayer held US stocks or ETFs with a cost of more than $100,000 in a Canadian investment brokerage account, she must answer “Yes” to the question in T1 General and file Form T1135.

Curiously, a Canadian taxpayer owning what one would reasonably consider “foreign property”, say a condo in Miami purchased for $250,000, strictly for personal use, does not have to file T1135! The taxpayer, who simply assumed that foreign stocks held in taxable Canadian brokerage accounts for which trading summaries are filed annually with the CRA and income taxes are paid, has to file T1135 if the cost of foreign stock holdings exceeds $100,000.

The penalties for failing to complete and file T1135 by the due date (April 30) are severe. The penalty for filing late is $25 per day for up to 100 days (maximum of $2,500). Since the penalty is levied for each year, a taxpayer could face penalties running into the tens of thousands of dollars.

Some notes about Form T1135:

- If you own foreign stocks in joint investment accounts, you should file Form T1135 only if the cost of your share of the investments exceeds $100,000.

- Canadian mutual funds and ETFs that own foreign stocks or ETFs are not considered “specified foreign property”.

- Foreign stocks and ETFs held in registered accounts such as RRSPs and TFSAs are also not considered “foreign property”.

- As already mentioned, real estate owned in foreign countries and held strictly for personal use are not considered “foreign property”.

It is entirely appropriate to levy strict penalties on taxpayers trying to hide income in foreign jurisdictions. It does not seem reasonable to levy stiff penalties on taxpayers who are reporting and paying taxes on investments held in Canadian accounts but inadvertently missed filing paperwork. In fact, the punishment strikes me as cruel and unjust.

NB: This post is of an informational nature and should not be construed as tax advice.

This article has 16 comments

  1. Unsure in Calgary

    Ram thanks for your excellent posts.

    Are you aware of any downside to responding “Yes” to this question if you are unsure of what is specified foreign property?

  2. CC, thanks for investigating and sharing your thoughts.
    I know I was confused about this strange T1135 beast, that the CRA requires people to fill in.
    This post helped a great deal as I reviewed my own situation.

    The good news is that I don’t have to fill out the form, as I don’t meet the threshold of amount of
    US stocks/ETFs, in my non-registered trading account.

  3. I agree with you that an honest taxpayer could easily mess this up. I’d love to see Vanguard create Canadian ETFs that hold US and foreign stocks without any hedging. This would solve a number of problems for me.
    (1) Assuming I understand “Canadian mutual funds and ETFs that own foreign stocks or ETFs are not considered ‘specified foreign property’” properly, I wouldn’t have to file a T1135.
    (2) I wouldn’t have to do as much currency conversion.
    (3) This one I’m not sure about — would this eliminate the concern of US estate taxes?

  4. Does this form actually impact the amount of taxes paid or your tax calculation in any way? It seems to be for disclosure purposes.. and if you need to report this foreign income for calculating your taxes it would be on other forms.

  5. @Michael: The fact that this is called a “Foreign Income Verification Statement” can be misleading. You have to disclose how much foreign property you own in addition to how much income you derived from it. I guess the idea is that if you have a lot of foreign property but report very little income from it, this will raise a flag at CRA. CRA views this as a way to make sure your foreign income matches up reasonably with your foreign assets. So, CRA sees it as verifying your foreign income. Taxpayers generally see it as a form where they have to disclose the amount of their foreign assets.

  6. @Unsure: Interesting question. If a taxpayer answered yes, they have to file Form T1135 and mail it in before April 30. It is best to provide accurate information in it. I don’t know what happens when the information is inaccurate.

    @Avrex: Once a taxpayer who only owns US stocks and ETFs in a Canadian brokerage account knows she has to file T1135, there shouldn’t be much of an issue. It’s just paperwork because T5s are going to be issued anyway and reported in the tax return.

    @Michael James: I agree with (1) and (2). And Canadian mutual funds and ETFs are not US in-situ property, so won’t fall in the US Estate Tax net. Personally, I’m prepared to pay say 10 basis points more on an ETF such as VTI and VEA just to avoid the three headaches you’ve outlined.

    For RRSP accounts though, US ETFs will still be preferable because one can avoid withholding taxes that Canadian ETFs holding foreign property have to pay.

    @Michael: The answer is no for Canadians owning foreign stocks and ETFs in Canadian brokerage accounts. T5s will be issued and filed along with the tax return whether or not the tax payer owns $100,000 or $1000. Trading summaries and tax slips are reported to the CRA and it is a simple matter for CRA to catch errors or deliberate omissions by taxpayers.

  7. I hold some US ETFs in a non-registered account (although nowhere near $100K). If I understand this correctly, I would report if my Adjusted Cost Base exceeds $100K? As opposed to the current value of the ETFs …

    The whole thing seems a bit weird/odd.

  8. So, if I understand this correctly, it sounds like I would have to file this form since I have over $100,000 in funds in a Vanguard IRA in the USA? Thanks for this info, I hadn’t heard of it.

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  10. Hi CC

    Great info on your blog by the way, thanks a bunch for spreading the knowledge.
    This post raised my curiosity since I am too in a situation that I thought will require me filling this T1135 as of next year… but what you say for foreign properties held for personal use not being counted towards these foreign assets is very interesting. Wondering if you could share some more info on it… maybe a link where you read about it.
    1. Interested to know since I am a dual citizen, Canadian and another country and in a situation where my parents passed away and inheritance is coming my way in the form of a few properties in the foreign country which totals more than 100K.
    If I understand your point right if you have 3-4 properties which you don’t rent out there or in other words you do not derive an income from them they are not counted towards foreign property for the provisions of T1135? In other words they are for personal use… As this does not really match with what I knew… which is: you receive a foreign inheritance larger than 100K. You personally do not incur any tax hit since that is tax exempt (inheritances, gifts etc) but if the value of those properties combined is more than 100K CRA requires you to fill that form since you now have a value of more than 100K outside Canada and on it you list the real market value of those properties at the time of inheritance. And later on if you sell them for a higher price and have a capital gain they will tax that, just like when selling a non principal residence property here in Canada.

    2. Also interesting to know what happens if you do rent them out. First you need to include that income in your taxes that’s for sure but if you paid taxes in the other country on that rental income I think there are some tax concessions here as well since it makes no sense to me to be taxed twice on the same income in 2 different countries? Am I wrong? And in this case I think CRA for sure will not consider those exempt from foreign property list as above in #1 where you just hold them without gaining any income from them.

    Interested to know your opinion. Thanks!

  11. @RBVH: I’ll take a stab at answering your questions but please be aware that I’m not providing you with tax advice in any shape or form.

    1. CRA makes it very clear that properties held solely for personal purposes are not “specified foreign property” and are not required to be disclosed in form T1135. It does not matter how many personal use properties a taxpayer owns. None of them go in Form T1135. Here are the relevant portion from the document linked to in the post:

    Q. I own a condominium in Florida that has a cost amount of $120,000. Am I required to file Form T1135 if the property is:
    (a) only for personal use?
    (b) rented out for eight months of the year with a reasonable expectation of profit and kept for personal use the other four months?
    (c) rented out year round with a reasonable expectation of profit?

    A. If the property is personal use property (i.e., property owned by you that is used by you or someone related to you primarily for personal use and enjoyment) you do not have to report the property on Form T1135. As a result, in situation (a), you would not need to report the condominium since it is held primarily for personal use and enjoyment.

    In situations (b) and (c), the property is an income-earning investment property that is not held primarily for personal use and enjoyment. As a result, since the cost amount is more than $100,000, you have to file Form T1135.

    2. The tax treatment of a personal property is exactly as you describe. The fair market value of the property on the date of acquisition (whether inheritance or other means) becomes your adjusted cost base. When you sell the property, you owe capital gains tax on the difference between the sale proceeds and the ACB.

    3. There may be tax treaties between Canada and another foreign country that provide relief for double taxation. CRA does provide you with some guidance but you may need the help of tax specialists:

    http://www.cra-arc.gc.ca/tx/nnrsdnts/trty-eng.html

  12. Hey CC and thanks a lot for the answers. Since posting my original comment I made some research as well and I ended up with the same conclusions you said, so I think I got it :)
    Like I said your blog is much appreciated for all this great stuff you can find on it… personally being a newly come to Canada this one and the Million dollar journey were my daily reads to bring myself up to speed to the Canadian game plan so to speak :)

    And while being on the subject of foreign property and T1135 if you don’t mind let me throw out there another question… which confuses me at this point while prepating my taxes. And I will use an example as it is easier to understand I hope.
    1. I mean for regular USD trading accounts is clear: if your combined assets in there are above 100K you check that box and report as Total income all your capital gains for the year in that accont correct?

    2. But say you have 70000 USD cash in your US trade account I wonder what happens to US short sales transactions… because as you know with leverage there you can end up controlling larger amounts. Since your cash becomes the margin requirement which usually is only 30% so with a 70k cash balance you can easily have a 150K short position opened.
    So say during the year you have a short sale type transaction that had a balance of 150K.
    Your cash balance was never above 100K but I wonder if this short sale one puts you within the T1135 requirements…?
    In theory I think it should not because in your short account you indeed had 150K from the short sale but you owed X number of stocks instead and it is not like you can withdraw those 150K from there. You can only use them to purchase back the stock.

    What do you think?

    thanks

  13. Just a note here for those who file electronically. Completing the form and submitting it to the CRA via Netfile or Efile, does not fulfill the obligations. You still need to print, sign and mail the form to Ottawa before April 30.

  14. Thanks for another great post. I need to find out if employee stock options or RSUs which have vested but have not been sold would count towards this limit. Any ideas?

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