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.