My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, September 15, 2014

Form T1135 – Permanent Changes for 2014 and Beyond

Last year I wrote several times about the onerous requirements proposed by the Canada Revenue Agency (“CRA”) in respect of Foreign Reporting and the related Form T1135, for taxpayers that held foreign investments with a cost of $100,000 or more. The proposed changes caused a huge compliance issue for financial institutions, accountants and taxpayers alike. As a result, the CRA eased its initial requirements and announced in late February, 2014, that for the 2013 tax year only, taxpayers could elect to report based on much less strict “transitional rules”.  

After further consultations with external stakeholders, the CRA announced that it has implemented several permanent changes to Form T1135 for the 2014 and later tax years. For the typical Canadian investor who holds foreign stocks, bonds and funds with Canadian institutions, these changes will simplify life substantially from the initial proposals. For those Canadians who own stocks, real estate, etc. outside Canada, the rules remain arduous. The changes are detailed below:

  • Foreign property held in accounts of Canadian registered securities dealers or a Canadian trust company will have the option of reporting foreign property using the “aggregate reporting method”, whereby the aggregate value of all foreign property in an account is reported rather than reporting the details of each property. If this reporting method is chosen, all property held within a Canadian registered securities dealer or a Canadian trust company must be aggregated on a country-by-country basis. Aggregate totals for the income earned and the gains/losses realized from all dispositions in the tax year must still be reported on a country-by-country basis.

  •  For investments which qualify for reporting under the “aggregate reporting method”, the amounts to be reported, on a country-by-country basis, will be the total highest month-end fair market value for the year and the total fair market value at the end of the year. (This is pretty much what the transitional rule was for 2013).

  •  The 2013 transitional Form T1135 provided a reporting exclusion if the taxpayer received a T3 or T5 slip from a Canadian issuer in respect of a particular specified foreign property. For 2014 and thereafter, the T3 or T5 slip exclusion has been eliminated, therefore all income will have to be reported regardless of whether a T3 or T5 slip has been issued. Although this exclusion made things easy for some people in 2013, the fair market requirement allows you to basically just review your investment statements for 12 months and report the highest market value and then just report your December 31, 2014 market value. The only time consuming task will be to summarize your income earned and capital gains realized for the year. However, many institutions and investment managers will likely summarize all or most of this information for you.

The CRA only accepted the 2013 version of Form T1135 for the 2013 taxation year and the 2014 taxation year until July 31, 2014. The 2014 version of Form T1135 must now be used for 2014 and later tax years. Here is the new version of the T1135. For the "typical Canadian", you will only be concerned with category 7.

Options


I have been asked a couple times about the reporting of options for T1135 purposes. One of my tax managers spoke to a CRA representative and was told that all options (including sold cash secured puts, covered calls, bought and sold in-the-money calls) should be included on Form T1135 under “Category 6 – Other Property Outside Canada” as specified foreign property pursuant to subsection 233.3(1) - “a property that is convertible into, exchangeable for, or confers a right to acquire a property that is Specified Foreign Property”. The CRA representative noted that as of August 1, 2014, these amounts should be reported under the new Category 7 using the aggregate reporting method assuming that the options are held in an account with a Canadian registered securities dealer.

Finally, the CRA told us that the cost amount would be the acquisition cost of the option, and not the value of the stock exposure.(Please be advised this is telephone advice and the CRA, Cunningham LLP and myself make no representation as to its accuracy). 

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

17 comments:

  1. Hi, one quick question: If I hold a Canadian ETF which holds foreign securities, I am not required to file a T1135, correct? Thank you.

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    Replies
    1. See this excellent blog by the Canadian Capitalist that discusses the issue. http://www.canadiancapitalist.com/own-foreign-stocks-or-etfs-you-may-have-to-file-form-t1135/

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    2. Great, thanks for that link.

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  2. Thanks for the summary. One other thing, how does this affect registered accounts (RRSP / TFSA / RESP / RDSP)? If I remember correctly, T1135 only applies to non registered accounts. I assume that still holds true for the 2014 reporting?

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  3. how about the reporting exception for first year new immigrant?

    ReplyDelete
    Replies
    1. As far as I recall, that is not a new change, but already in existence.

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  4. In the past I believe that if you had an IRA it was not to be included. Is that correct?

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    Replies
    1. Your answer is here

      http://beltramewealthmanagement.com/blog/understanding-the-new-t1135/

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  5. Hi Bean Counter,

    How do you determine the country code of each stock holding in the brokerage account? Is it the location of the headquarter of the company, the legal domicile of the company, or the location of the stock exchange where the stock is listed?

    Thank you.

    ReplyDelete
    Replies
    1. The CRA has a Q&A sheet, this is there answer:

      For the purposes of form T1135, the country code for shares of a non-resident corporation is the country of residence of the corporation

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  6. Hi Bean Counter,
    Suppose I have multiple brokerage accounts, and each of them has some US stocks and some UK stocks.

    For T1135 form category 7, do I just aggregate all the US stocks together across all brokerage accounts, or create separate entries for US stocks in category 7, one for each brokerage accounts?

    Thank you.

    ReplyDelete
    Replies
    1. Hi Anon

      I create separate entries for each brokerage.

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  7. Hi Blunt Bean Counter,
    This is a great blog!
    I own U.S. stocks through a Canadian online investing bank account. So I presume that means I qualify for category 7. But one thing that confused me was the column that says, "Income (loss)". How do I calculate that? The only thing I can think of for that would be dividend income, but not sure if that is what they are looking for.

    Thanks!

    ReplyDelete
    Replies
    1. I am posting an updated T1135 blog in two weeks. Income is all income including dividends, interest, etc, so in most cases if you have just stock holdings, income will generally be dividends and/or interest if you have bonds etc.

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  8. Hello,
    When I calculated the maximum FMV during the year, I used the avg. yearly exchange rate, which I was told was allowed. But then it asked the FMV at year end where I'm supposed to use the Dec 31st exchange rate, which is quite high. So the FMV at year end is actually higher than the "maximum" FMV during the year due to the difference in exchange rate. Do you have any opinions on what should be put as the maximum FMV in this case? Thanks

    ReplyDelete