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.

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.

T1135 Foreign Reporting – This is Relief?

I have previously written about the onerous new reporting requirements the revised T1135 Foreign Income Reporting form imposes upon Canadian taxpayers who have over $100,000 (cost) of foreign holdings. While most accountants understand and can live with the additional detail required for foreign assets located outside of Canada, most of us could not understand why the CRA persisted on detailed reporting for foreign stocks and bonds held at Canadian institutions. The CRA’s position is/was that if a foreign security held at a Canadian Institution did not pay a dividend and thus was not reported on a T3 or T5, you had to separately detail that security. For many taxpayers, that could mean detailing 15-25 securities for stocks from Berkshire Hathaway to Netflix.

Despite protestations from various accounting bodies, the CRA held firm in its position. Over the last couple months, the financial institutions began to wake up to the reality that providing this information to its clients and/or accountants was a massive project which its systems were not designed for.

Well yesterday, for 2013 only, the CRA provided some mild transitional relief.

Foreign Property and Unit Trusts held with Canadian Registered Securities Dealer

 

Taxpayers who held foreign property in 2013 in an account with a Canadian registered securities dealer may now report the combined value of this property, rather than reporting the details of each property. A taxpayer that chooses this reporting method must use it for all accounts with Canadian registered securities dealers.

Why is this Relief Problematic?

The CRA says that if you want to file using a combined value of all your foreign property, they want you to file using Category 6 of the T1135 Form. However, Category 6 requires you to report the maximum cost amount of your foreign holdings during the year and the cost of all those foreign holdings at the end of the year.

Thus, unless the revised form changes these requirements for Category 6, you or your investment advisor will need to somehow determine what was your maximum cost of your foreign holdings during 2013, not an easy chore by any means.

Unless the form changes, you need to pick your poison. Your choice is:

1. Provide a listing of any specific stocks that did not pay dividends and the maximum cost for those specific stocks and the cost at the end of the year, or

2. Search your daily records to determine what were the maximum cost of all foreign holdings during the year and the cost at the end of the year of any foreign holdings.

Bloggers Note: Of course after I wrote the above, the CRA has just released an updated T1135 Form. The instructions for Category 6 have been revised for transitional reporting. For the maximum cost amount, you do not need to determine any value, just enter "0". For the cost amount at the end of the year, enter the market value of your foreign property at the end of 2013.

Thus, in summary, if you do not wish to report specific securities not paying dividends, you can use the transitional reporting method and all you need is the fair market value at the end of 2013. Why could the CRA not say that in their initial press release?

Filing Extension

The CRA is also extending the filing deadline for Form T1135 for 2013 to July 31, 2014. Yippee, tax season gets further extended.

My Sentiments Exactly

Moodys Gartner Tax Law summed up this whole issue very well in their excellent tax blog: “While the transitioning rules are certainly welcome, it appears that the CRA is still not wholly listening to tax accountants in Canada. Today’s announcement does not provide a permanent solution for the large amount of criticism with respect to the “T3/T5” exception. Many tax accountants were hopeful that all specified foreign property held by Canadian registered securities dealers would be excluded given the low risk for tax evasion involved with these accounts.”

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.

The Revised T1135 – This Could Get Ugly for Taxpayers, Investment Advisors & Accountants

I’m back from a summer of hiking and golfing. I had a great time going east to west across Canada. Specifically, I went with my wife to Gros Morne National Park in Newfoundland which was incredible (pictures and blog to follow in the next few weeks). This was followed by a boys’ golf trip to Predator Ridge in Vernon, BC, a short drive from Kelowna. I could not ask for much more; except for the course marshals at Predator to take some chill pills.


Western Brooke Pond
Newfoundland

All this crisscrossing of Canada did not leave me much time to work on my book so I am still sitting on two chapters; I either get traction this fall or the book dies an early death. I also did not take any of the guitar lessons my wife bought for me, but I intend to book lessons in the fall, so watch out Jimmy Page.

The T1135

To provide some symmetry to my return to blogging, I start off where I left off. You may recall that my last blog discussed the revised T1135 Foreign Income Verification Form ("T1135"). In that post I discussed the new reporting requirements, which now includes the following:

• The name of the specific foreign bank/financial institution holding funds outside Canada
• For each foreign property identified on the T1135, the maximum funds/cost amount for the property during the year and cost amount at the end of the year (the old form only required the cost amount at the end of the year if at anytime in the year you exceeded the threshold)
• For each foreign property identified on the T1135, the income and capital gain/loss generated (the old form asked for total income or gains from all foreign property in one lump sum)
• Specific country where each foreign property is located (the old form had pre-defined groupings based on each continent for all the property on an aggregate basis) 

The T3/T5 Exclusion

I concluded my July 2nd post by saying that “There is one important saving grace to these rules. If the income for a foreign property is reported on a T3 or T5, the details do not have to be reported. This will exempt most U.S. or foreign stocks held with Canadian brokerages; but the details for property held outside Canadian institutions will be burdensome”.

While the above statement is essentially correct, the CRA’s administrative position in regard to this exemption may prove problematic. You see, the CRA is saying that even where you hold a foreign stock or bond in an account with a Canadian brokerage firm that issues a T3 or T5 for that account; if that security does not pay income in the form of a dividend or interest and thus is not reported on the T3 or T5, the specific stock or bond will not be excluded and will have to be reported in detail on the T1135. This position was recently confirmed by a CRA representative to one of my tax managers.

In addition, it must be noted you will still be required to file the T1135 if the total cost amount of your foreign holdings exceeds $100,000 at anytime during the year, even if dividends or interest is reported on a T3 or T5. See the example discussed in this article by Jamie Golembek, where the CRA representative states you would still need to file the form and check the reporting exclusion box for the stocks reported on a T-slip.

The Tax to English Version

 

So what does this all mean in English? Say you own 25 foreign stocks held at a Canadian brokerage that have a total cost of $150,000, but five of those stocks do not pay dividends or fail to pay a dividend in that year. As we now understand the CRA’s position, even though the 20 dividend paying stocks do not need to be individually listed, the 5 non-dividend paying stocks must be reported. Thus, you will need to tick the box on the T1135 Form to claim the exclusion for the 20 stocks, but you will also have to determine the highest cost amount of each of the five non-excluded stocks during the year (troublesome if you bought and sold) and the cost amount at the end of the year in addition to providing other information such as country location and capital gain or loss.

In the example above, if all 25 stocks pay dividends that will be reported on a T3 or T5, you will still have to file the T1135 and check the exclusion box; however, you do not need to report all the details of each individual stock. Clear as mud.

For people with only a few foreign holdings, this is not much of an issue. However, I have clients who are in private client programs with the large Canadian financial institutions that own 20-50 shares of multiple foreign stocks or have private managers running their money who have upwards of 50 U.S. and foreign stock/bond holdings. This means that the client, the advisor, or their accountant, or probably a combination of all three must review all these stocks to determine which ones are exempt from reporting because they paid a dividend or interest that was reported on a T3 or T5 from those that did not have any income reported on a T3 or T5.

My tax manager said the CRA representative he spoke with, gave him the impression that the CRA’s position has not gone over very well. Let’s hope the CRA simplifies life for many Canadians and just exempts any foreign security held at any Canadian Institution whether income is reported on a T-slip or not.

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.

IRS Sets Forth Amnesty Procedures for U.S. Citizens Living in Canada

Over the last year or so, I have written blog posts on the requirements of U.S. citizens to file both Canadian and U.S. income tax returns and the outrageous penalties that could be assessed for not filing Internal Revenue Service ("IRS") information forms. In addition, I posted on the possibility of a true amnesty for Americans living in Canada after Finance Minister Jim Flaherty jumped into the dual tax filing fray.

Well, that amnesty may now be close at hand. On Tuesday, IRS Commissioner Doug Shulman announced a plan to help U.S. citizens residing overseas, including dual citizens, catch up with tax filing obligations and provide assistance for people with foreign retirement plan issues. As he said in the press release "Today we are announcing a series of common-sense steps to help U.S. citizens abroad get current with their tax obligations and resolve pension issues,".

While some of the details are still forthcoming, the IRS set forth a new procedure in which taxpayers who are considered a "low compliance risk" will be required to file three years of income tax returns and six years of Foreign Information Returns. All submissions will be reviewed and for those low risk taxpayers, the review will be expedited and the IRS will not assess penalties or pursue follow-up actions, although any tax owing must be paid.

Higher compliance risk returns are not eligible for the procedure and will be subject to a more thorough review and possible full examination. In these cases, tax, interest and penalties may be imposed.

The press release says this about compliance risk determination:

“The IRS will determine the level of compliance risk presented by the submission based on certain information provided on the returns filed, and based on certain additional information that will be required as part of the submission. Low risk will be predicated on simple returns with little or no U.S. tax due. Absent high risk factors, if the submitted returns and application show less than $1,500 in tax due in each of the years, they will be treated as low risk. In general, the risk level will rise as the income and assets of the taxpayer rise, if there are indications of sophisticated tax planning or avoidance, or if there is material economic activity in the United States. Additional risk factors include any additional history of noncompliance with United States tax law and the amount and type of United States source income. Additional information regarding the specific factors the IRS will use to assess the level of compliance risk, and how information regarding those factors should be presented in the submission, will be released prior to the effective date of the new procedure.”

The above procedure will also provide for retroactive relief for failure to timely elect income deferral on certain retirement and savings plans (Canadians who have RRSP’s are required to elect to defer the yearly RRSP earnings) where deferral is permitted by relevant treaty will be available through this process. The proper deferral elections with respect to such arrangements must be made with the submission.

Although the concept of “compliance risk” seems to leave the IRS with significant discretion, the new procedure should allow the majority of U.S. citizens living in Canada to comply with U.S. income tax regulations without a significant financial cost. For those with a high compliance risk, the press release does not appear to provide much relief or if it does, you are rolling the dice with the IRS and are at their mercy.

Finally, there is no discussion about whether Canadians who complied with the earlier amnesty programs and paid interest and penalties, can apply to have those funds refunded.

Bloggers Note: As I have no knowledge of how this amnesty will work other than what the IRS press release and procedure states, I will not answer any questions in relation to this blog.

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.