T1135 Foreign Reporting Form – 2014 Update

The T1135 Foreign Income Verification Statement has to be the most problematic tax form in history. Readers of my blog know that I have written multiple times on this topic and will do so again today, to update you about the changes to the form for 2014. Not only has the form and the reporting requirements changed several times over the last couple of years, the form continues to cause confusion for taxpayers and professional accountants alike. I understand there are still ongoing discussions with the Canada Revenue Agency by representatives of both the accounting and investment industries, as the form is still considered to be too complicated by many.

Complicated or not, the form and rules have changed for 2014 and I provide below a quick review of the rules and discuss some of the changes for 2014.

The General Rule

The T1135 must be filed by individuals, corporations, trusts and certain other persons who own specified foreign property ("SFP") costing in total more than $100,000 CAD at any time during the year. Note the word costing. That means you use the adjusted cost base, not the fair market value of the investment.

Exceptions

Some common exceptions to the reporting requirements are as follows:

•  RRSPs are not reportable

• Foreign property held in a Canadian mutual fund is not reportable. E.g.: Even if the Canadian fund owns U.S. stocks, the fund is not reportable.

• U.S. cash held in a Canadian Institution is not reportable.

• Personal use property (e.g. Florida Condo) that is used exclusively by the taxpayer as a vacation property is not reportable. However, foreign personal use real estate can get complicated. If for example, you rent out the property for eight months of the year with a reasonable expectation of profit and use the property for personal use the other four months it must be reported. However, if the property is rented out for part of the year without a reasonable expectation of profit, (just for the purpose of recovering a portion of condominium expenses) than the property is most likely not reportable. If unsure, I would suggest you file the form to be safe.

Extension of Reassessment Period

It is very important to note that the reassessment period, starting in 2013, is extended for three additional years if the following conditions are met:

• you failed to report income from a SFP on an income tax return and
• the T1135 was not filed, was not filed on time, or was filed inaccurately.

Thus, missing just one minor investment might be sufficient to extend your assessment period a further 3 years.

Changes for 2014 T1135 Reporting

The following are some of the key changes for 2014:

• The form can be Efiled by individuals

• The option to check the box where income is reported on a T3 or T5 is no longer available

• A revised aggregate reporting method is available, but is much more complicated than last year’s version

• For accounts with Canadian registered securities dealers or federally or provincially regulated trust companies, there are now two choices:

(1) Under Category #2, enter the Country Code, maximum cost during the year, cost at year-end,income (loss) and gain (loss) if applicable for each individual investment or

(2) Use the 2014 aggregate reporting method (i.e.: report by country for each investment account, rather than for each individual stock and bond held in the investment account as per #1 above). So for example. If you have an account with say TD Bank and in that account are 5 stocks, companies A,B,C,D&E, you can either report the details of A,B,C,D&E individually or just report A-E as an aggregate which is far simpler (subject to the country by country reporting discussed below).

For the aggregate reporting method you will use Category 7 of the form and you will be required to report the following details in aggregate for each investment account:

• The highest Fair Market Value (“FMV”) during the year (which can be highest month end FMV) of foreign property

• FMV of foreign property at year end

• Gains/losses on the SFP for each investment account being reported

• Income/loss on SFP for each investment account being reported

Again, because you can report using the FMV under Category 7, which can be taken directly off your monthly investment statements, it is typically a far simpler choice than using Category 2 which requires you to use a cost basis which most people have to dig up from old records.

Country Reporting

For 2014 you must segregate the category 7 amounts by country.

• The country determination will generally be where the company/trust/issuer is resident (easier said than determined in many cases)

• If you can’t determine the country of residence, the CRA says it is acceptable to use “other” for country

• You will be pleased to know you are required to work through SFP on a country-by-country basis to determine which month is highest, and then report that balance.

Foreign Exchange Conversions

As discussed in my blog post last week, if your financial institution or investment firm does not do this for you, you will need to convert foreign holdings to Canadian dollars as follows:

• For highest month-end FMV – can use average rate

• For the FMV at year-end – use the closing rate

• For the income/(loss) – can use average rate

• For capital gains/losses – you are required to calculate gains on schedule 3 using historical rate. The T1135 capital gains should agree to what you report on schedule 3 of your return.

Many had hoped that the various concerns of taxpayers, accountants and financial institutions would have caused the CRA to simplify this form. However, as you can see, the T1135 is just getting more and more complicated.

Note: As I discussed last week, I have disabled the comment/question feature of the Blog. I just do not have the time to answer questions during income tax season (this includes emails to my BBC or business email accounts). I know this will not be popular in respect of this post, based on the fact I have had over 225 questions and comments on my prior T1135 blog posts. I apologize in advance and thank you for your understanding. Hopefully the link I provide below will answer any questions you have.

Since I am not answering your questions, I will direct you to the Chartered Professional Accountants of Canada blog, that answers many questions. Hit the link to "list" in the second paragraph. There are 143 questions asked about the form, many for which the CRA provides a response.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.