Canada’s approach to taxing its residents on worldwide income, as stipulated in the Federal Income Tax Act (ITA), extends beyond domestic borders. Today, we will focus on ITA’s “specified foreign property” (SFP) reporting regime. It’s crucial to note that separate rules apply to foreign affiliates (T1134), which are not covered here.
Who Must Report
The ITA, under Section 233.3, mandates annual reporting for “specified Canadian entities” (SCEs) owning specified foreign property whose cost exceeds $100,000 at any point during the year. Most individuals, trusts, and corporations resident in Canada, along with partnerships (with certain conditions), fall under the SCE category.
What to Report
Specified foreign property encompasses a range of foreign-held assets, including funds, intangible or tangible properties, shares of non-resident corporations (except foreign affiliates), interests in non-resident trusts or partnerships, and debts owed by non-residents. However, assets used in active businesses, shares or debts of foreign affiliates, non-purchased interests in non-resident trusts, personal-use, and listed personal properties are exempt.
Determining Cost Amount
The “cost amount” of specified foreign property is pivotal for reporting and is defined by the ITA. It generally refers to the adjusted cost base (ACB) of a capital property. New immigrants to Canada should note that the ACB is typically the fair market value upon immigration. Other rules apply based on the property type and the taxpayer’s status.
Reporting Process and Deadlines
SCEs must file a T1135 Foreign Income Verification Statement by the income tax return due date. New Canadian residents are exempt from filing a T1135 in their first year. The form’s complexity varies with the specified foreign property cost amount: a simplified section for holdings under $250,000 and a detailed section for those exceeding this threshold.
Penalties for Non-Compliance
Non-compliance can lead to significant penalties, ranging from $100 to $24,000 per year, depending on the nature of the failure – from simple omission to gross negligence. Taxpayers may contest these penalties, with the burden of proof for gross negligence falling on the CRA.
Extension of Reassessment Period
The CRA’s standard three-year reassessment period extends by three additional years if a taxpayer fails to file or misreports a T1135 and omits specified foreign property income in their tax return.
Voluntary Disclosures
Taxpayers who have missed reporting deadlines or made errors can utilize the CRA’s Voluntary Disclosures Program (VDP), potentially reducing penalties. The VDP requires voluntariness, completeness, timeliness, and estimated tax payment.
Conclusion
Given the complexities and significant penalties associated with foreign asset reporting under the ITA, individuals holding such assets are advised to consult tax professionals to ensure compliance. This not only guarantees adherence to the law but also safeguards against potential financial repercussions. Book your appointment today!