Form T1135: Reporting Foreign Property in Canada

Oct 1

7 min read

Owning assets abroad has become increasingly common among Canadians, particularly for newcomers who maintain bank accounts, property or investments in their country of origin. What many taxpayers do not realize, however, is that holding such assets can create a separate disclosure obligation with the Canada Revenue Agency (CRA).

When the combined cost of a Canadian resident’s foreign investment property rises above $100,000 at any time in a year, Form T1135 must be filed. This requirement exists independently of whether the assets earned any income or whether any tax is owing, and the consequences of overlooking it can be costly.

In this article, we outline who must file, the types of assets that need to be disclosed, and the options available to those who have fallen behind on their filings.

Purpose:

Form T1135, formally titled the Foreign Income Verification Statement, does not determine the amount of tax a person owes. Instead, it serves as a disclosure document that informs the CRA about the foreign assets a taxpayer owns, the countries where those assets are situated, and the income they generated over the year.

Because Canada taxes its residents on income earned anywhere in the world, the CRA relies on this form to verify that earnings from foreign sources, including interest, dividends, rental income and capital gains, are being properly included on Canadian tax returns.

Applicability:

The filing obligation arises when the total cost of a taxpayer’s specified foreign property was greater than $100,000 in Canadian dollars at any moment during the year. This rule applies equally to individuals, corporations and trusts that are resident in Canada. It also extends to partnerships in which members resident in Canada, other than exempt members, are entitled to more than ten percent of the partnership’s income or loss.

Several features of this threshold are commonly misunderstood. First, the calculation relies on the original cost of the property, known as its adjusted cost base, rather than its current market value. An investment portfolio that was purchased for $90,000 and has since grown in value to $150,000 therefore does not meet the threshold. Second, the test is not limited to the balance at the end of the year. If a taxpayer held $120,000 in a foreign account during the summer but only $40,000 by December, the form is still required. Third, investments acquired with borrowed money, whether through a loan or a margin account, are counted at their full cost without any reduction for the debt.

Where property is owned jointly, each owner considers only the portion attributable to them. For example, if two spouses together purchased a foreign rental property for $180,000, each is treated as owning $90,000, and neither would be required to file unless they held additional foreign assets. Individuals who arrive in Canada and become residents during the year are also relieved of the obligation for that first year of residency.

Reportable Assets:

The reporting rules focus on property held for investment purposes.

Foreign bank accounts are among the most common examples, including Indian NRO and NRE accounts, fixed deposits and accounts held with banks in the United States.
Shares of foreign companies must also be reported, and this includes shares held through a non-registered account with a Canadian brokerage, such as investments in large American corporations. Foreign mutual funds and exchange-traded funds, interests in non-resident trusts and partnerships, loans owed to the taxpayer by non-residents, and foreign bonds or debentures are likewise reportable.
Real estate located outside Canada that is rented out or held as an investment, including undeveloped land, falls within the rules as well, as do gold and other precious metals stored outside the country.

Exclusions:

Funds deposited with a Canadian financial institution do not need to be reported, even when held in U.S. dollars.
Foreign securities held within registered plans, such as an RRSP, TFSA, FHSA, RRIF, RESP or RDSP, are also exempt, as are Canadian mutual funds and exchange-traded funds that invest internationally.
A home or vacation property abroad that is used mainly for personal purposes is not considered specified foreign property, nor are personal belongings such as jewellery and vehicles.
Property used exclusively in carrying on an active business is excluded, and shares of a foreign affiliate are disclosed on a separate form, the T1134, rather than on the T1135.

When there is any doubt about whether a particular asset falls within the rules, it is prudent to seek advice before the filing deadline, as resolving the question in advance is far easier than correcting an omission later.

Due Dates:

The form must be submitted by the same date as the taxpayer’s income tax return. For most individuals, this is April 30 of the following year, while self-employed individuals and their spouses or common-law partners have until June 15. Corporations must file within six months after the end of their fiscal year, together with their T2 return. Trusts are required to file within 90 days of the end of their taxation year, and partnerships must file by the deadline for the partnership information return, which is generally March 31.

Both individuals and corporations may submit the form electronically alongside their return using certified tax software, although paper filing remains an option. It is important to note that the form must be filed even in a year when the foreign property produced no income at all.

Penalties:

The CRA may impose penalties even where all foreign income was correctly reported and no additional tax is owing. A late-filed form attracts a penalty of $25 for each day it is overdue, with a minimum of $100 and a maximum of $2,500 for each year.

More severe penalties apply where the failure to file is knowing or results from gross negligence. In such cases, the penalty is $500 for each month the form remains outstanding, up to a maximum of 24 months, for a total of $12,000. This amount doubles to $1,000 per month if the CRA has formally demanded that the form be filed. Where the failure continues beyond 24 months, an additional penalty equal to five percent of the cost of the unreported property may be assessed. Providing false information or omitting required details from the form can result in a penalty equal to the greater of $24,000 and five percent of the cost of the property.

Beyond these monetary penalties, there is a further consequence that is easily overlooked. When the form is filed late or is incomplete, the CRA receives an additional three years to reassess the taxpayer’s return with respect to income from the foreign property. For an individual, this means a tax year that would ordinarily close after three years may remain open for six.

Common Mistakes:

Many taxpayers are unaware that U.S. shares held in a non-registered account with a Canadian brokerage are reportable, even though the same holdings inside a TFSA or RRSP would not be.
Newcomers frequently forget about savings accounts, fixed deposits, mutual funds and shares that remain in their home country, which can easily surpass $100,000 once converted to Canadian dollars.
Inherited or family-owned land abroad is sometimes mistakenly treated as personal property, even though land that is rented out or held as an investment must be disclosed.
Another common error is relying only on the balance at December 31, when the threshold may have been exceeded earlier in the year as a result of a sale or transfer of funds.
Some taxpayers file the form but neglect to report the related income. The T1135 discloses the property itself, but interest, dividends, rental income and capital gains must still be included on the tax return, and any foreign tax paid on that income may qualify for a foreign tax credit.

Solution:

Taxpayers who should have filed the form in previous years are well advised to correct the situation before the CRA raises the matter. Where the related foreign income was already reported, filing the outstanding forms may be all that is needed, although the CRA may still assess late-filing penalties. In such circumstances, a request for penalty relief may be submitted under the taxpayer relief provisions if there was a reasonable cause for the delay.

Where foreign income was also left off prior returns, an application under the CRA’s Voluntary Disclosures Program may be the more appropriate route. This program can provide relief from penalties and partial relief from interest, provided the disclosure is made voluntarily, before the CRA has begun any enforcement action, and is complete in all respects. The most suitable approach depends on the number of years involved, whether income was omitted and the amounts at stake, so professional advice should be obtained before any filings are made.

Other Requirements:

The T1135 is only one of several forms the CRA uses to monitor foreign holdings. Taxpayers who own shares in a foreign affiliate, which generally means an interest of ten percent or more in a foreign corporation, must file Form T1134. Those who have transferred or loaned property to a non-resident trust may need to file Form T1141, while those who have received a distribution from, or owe money to, such a trust may be required to file Form T1142. Individuals who are leaving Canada and own property with a total value exceeding $25,000 must generally file Form T1161.

How We Can Help:

At Manu Bhai CPA, we work with newcomers, investors and business owners who hold assets in India, the United States and other countries. We can review your foreign holdings to determine whether the reporting requirement applies, calculate cost amounts and the appropriate currency conversions, and prepare and file Form T1135 together with your personal or corporate tax return. Where filings have been missed, we can guide you through late filing, requests for taxpayer relief or an application under the Voluntary Disclosures Program.

To schedule a consultation, please call us at 825-513-3951, email support@manubhaicpa.com, or book an appointment online through our website.

This article is intended to provide general information only and should not be relied upon as tax or legal advice. Tax laws change regularly and every situation is different, so please consult a qualified professional before making any decisions.