T1135 - Some Guidance on Common Issues

I have written multiple blog posts over the last few years on the T1135 Foreign Reporting Income Verification Statement. I have no interest in writing one more time on how to complete the form, but I thought I would provide you some guidance on some common questions I receive.

U.S. Bank Accounts and other Foreign Accounts

Cash situated, deposited or held outside of Canada even if in Canadian dollars is considered specified foreign property and subject to reporting on the T1135.

So, if you hold a $U.S. denominated bank account with a Canadian Financial Institution, you do not need to include the account on your form T1135. However, if you have a bank account with a U.S. or foreign bank you must include that account on your T1135.

Mutual Funds & ETFS

Mutual funds that are resident in Canada do not need to be reported, even if they hold foreign stock. However, any mutual funds not resident in Canada must be reported.

To the best of my knowledge, the CRA has not definitively answered how to treat ETFs. What they have said is that for the purposes of country reporting, the residency of the mutual fund or exchange traded fund itself is the country of the investment. Thus, one can seemingly infer that ETFs that are resident in Canada would be excluded from reporting. That may be easier said than done and some people make that determination based solely on whether there is a Canadian tax slip issued (inferring the ETF is thus Canadian resident). How is that for an opaque answer? 

Canadian Stocks denominated in $U.S. 

A Canadian stock denominated in $U.S. held at a Canadian brokerage does not need to be reported on the T1135. It is residence of the issuer that is the determinative issue, not the denomination.

Joint Ownership

Jointly owned investments must be split for purposes of the T1135. Thus, if you and your spouse jointly own U.S. stocks with a cost of $160,000 Cdn, you are each considered to own $80,000 of U.S. stocks. Each spouse must then independently calculate whether they have other foreign assets that would cause them to exceed the $100k threshold (i.e. you have more than $20k in other foreign assets).

Personal Use Property

If you own a personal use property outside of Canada, it is excluded from reporting. This will include a U.S. Condo, European Villa, time share or similar property. If there is incidental income, that income does not disqualify the property, as long as the primary use is personal use. This can be very subjective, so be careful.

New Immigrants and Returning Residents

An individual does not have to file Form T1135 for the tax year in which he or she first become resident in Canada. However, if you were formerly a Canadian resident and are returning, the exemption does not hold and you must file a T1135 from the entire year.

Gross Income for Rental Properties

The T1135 form asks you to report your income for real property. One would think that means you are required to report the net rental income (gross rental income less rental expenses), however, you are supposed to report just the gross rental income on the form and ignore the related expenses.

The above guidance is based on various CRA comments and CRA documents I have read. The CRA is not bound by any of the above, so I take no responsibility for the accuracy of the above guidelines.

Note: I am sorry, but I do not answer questions in April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

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. Please note the blog post is time sensitive and subject to changes in legislation or law.

Confessions of a Tax Accountant -2014- Week 4

This year I am going to end my confessions series a week early. I am doing this for two reasons. Firstly, to be honest, I have not found much to write about that I have not already discussed in prior income tax seasons (other than the T1135 fiasco). Secondly, I am a little burnt out from tax season (getting a mild case of food poisoning and having your back act up never helps). So I will see you again in a couple weeks, hopefully in a better state of mind, but until then, I have a couple tips for filing your tax returns this year and some tax planning tips you should consider implementing sooner rather than later.

A Couple Final Reminders

1. File your income tax return on time (May 5th this year) to avoid the 5% late filing penalty (in addition to the 5%  penalty, there is an additional penalty of 1% a month thereafter for each month you are late - that could total 17% in total).

2. If you have to file the T1135 Foreign Reporting Form, file it as soon as it is completed. With the July 31st deadline extension, you may either complete the form and not rush to file, or put it off. However, where the form is not filed as required, the CRA can levy a penalty equal to $25 a day to a maximum of $2,500.

Tax Planning for 2014

 

While taxes are on your mind, you may want to consider some tax planning you can undertake now or plan to undertake in 2014.

Prescribed Rate Loans

 

If you are lucky enough to have significant non-registered assets and your spouse is in a low marginal tax rate or does not earn any income, you may wish to consider a prescribed interest loan to your spouse before June 30, 2014. Essentially, you can make a loan at 1% until June 30, 2014 (at which time the prescribed rate may or may not change) and that rate of interest remains for the life of the loan. Thus, as long as your spouse can earn greater than 1% a year on those funds, you have benefited from income splitting. As discussed below, there are interest payment requirements that must be met. Here are three prior posts I have written on this topic:

1. 1% Prescribed Interest Rate Loan - A Great Income Splitting Opportunity - A good overview.

2. Paying for Private School With Tax-Free Money -  A discussion about using a prescribed loan to fund your child's education. You need to read this one in conjunction with the third post.

3. Prescribed Rate Loans Using a Family Trust - Again, you need some large coin to do this, probably at minimum a few hundred thousand in non-registered accounts, but very effective if you have the money.

Transferring Capital Losses Amongst Spouses

 

If you or your spouse have any unused capital losses after preparing your 2013 tax returns, and  the other spouse has unrealized capital gains, you may want to consider transferring the capital losses to the spouse who has the unrealized gains. If you are in this situation, you should start the planning for this now. As this type of planning is complicated, you should speak to your accountant (or engage an accountant for a short consultation) to ensure you do this properly.

I discussed this type of planning in this capital gains post, go to the 3rd paragraph from the bottom (Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains).

Get Your Record Keeping In Order 

If you were scrambling this March and April to put together either your employment expenses, rental income or self-employment income, then make your life easier and either start using Quicken or create an excel spreadsheet to track these costs. If you update your expenses every month, not only will you reduce your stress next tax season, but you will have more accurate records and most likely capture more expenses.

In addition, get in the habit of downloading any donation receipts immediately. This will ensure you do not miss any donation credits next year and save you scrambling to recall which donations you made.

Make the Acronym Contributions Early

 

Don't wait to next December to make your RESP or TFSA contributions or February, 2015 in the case of RRSPs. Where possible, make these contributions throughout the year. It will ease your cash flow and these accounts will have additional time to grow tax-free.

That's it for now, I've got a bunch of tax returns to get out.

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.

Confessions of a Tax Accountant -2014 -Week 1

For each income tax season since 2011, I have published a series of posts called Confessions of a Tax Accountant. These posts highlight contentious and/or interesting personal income tax issues that arise in my practice during income tax season. Today, I continue with this tradition.

Every year at this time, I whine about the fact I have received very few income tax returns to date and this year is no exception. Most of my clients with complex tax returns still await their T3’s and T5013’s, meaning I will again have a severe income tax crunch the last three weeks of April. I will save you my annual rant on this topic. Since I have reviewed very few returns and have little material to discuss, today's post deals with changes to various forms and issues of an administrative nature.

New T5013 Partnership Information Form

For those of us who/will receive a T5013 tax slip for either our partnership income or flow-through tax shelters, you will notice the absence of one thing on the form; written descriptions for each box on the form. In prior years, each box had a number associated with each box and a written description. For example: for interest income earned, the box said interest from Canadian sources, for carrying charges it said carrying charges. This year, the form in some cases has like forty boxes with only four of those boxes having a written description. It is like looking at a crossword puzzle gone wild.

You have to either read the summary page to determine what each box is for, or use your tax preparation software to match up the box number to the written description. It is extremely frustrating and my clients have no idea what the numbers mean to them.

Online T-slips

For many of us, working in a paperless or online world is now part of our daily routine. However, in situations where paper still rules (such as with tax slips), dealing with the early online adopters can be problematic.

-Even though I have only processed a few returns, I have already had to ask a couple clients for their T-slips from Ing Direct and TD Waterhouse (although some people seem to get paper T-slips from TD Waterhouse, so I am not sure if those not receiving paper forms have elected to receive online receipts) when I noticed they reported income last year, but have no slip this year.

The issue with online tax forms is clients either a) don’t realize they are online or b) forget to download the slip.

Not reporting the income on these slips can be a costly omission if the CRA catches these missing slips when they undertake their matching program in the fall. The non-reporting of these slips could result in a 20% penalty if this is the second time you have missed reporting a slip in the last four years, or it could start the clock ticking on a 20% penalty.

I am not sure of the solution here, but online issuers need to build in a reminder system to their clients when a form has not been downloaded by March 31st (they may already do this, but I am not aware of it if they do).

T1135 Foreign Verification Form

I have written numerous times about the changes to the T1135 Form. Even with the transitional relief provided for this year, this form is still proving problematic. For example, even though you now only have to report the market value of foreign stocks held with a Canadian Institution on December 31, 2013, some broker reports have listings where Canadian and US stocks are intermingled and so we have to pick out the foreign stocks individually.

The form is also proving very troublesome for U.S. citizens who live in Canada and expatriates from other countries, as they have to report foreign stocks they hold outside Canada (they often still have a U.S. or foreign brokerage account) and U.S. or foreign bank accounts.

The CRA should send a few of its representatives to work in an accounting firm for a week and then have them report back on what they think of the new T1135 reporting requirements. I cannot even imagine the mess that will occur if the original rules are re-instated in 2014, where you must list any stock that does not pay a dividend individually.

My problem with this form is that it overwhelms those people who willingly report information that is readily accessible to the CRA, especially where they hold their investments with Canadian financial institutions. While I get why the CRA wants enhanced reporting for taxpayers with assets outside of Canada, I am somewhat skeptical that people hiding and/or not reporting foreign assets will now become compliant because the T1135 is more detailed.

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.

2013 Federal Budget

The Federal Minister of Finance, Jim Flaherty, today presented the 2013 Federal Budget. While there are no changes to corporate income tax rates, there is an increase to the personal income tax rate on non-eligible dividends paid by most private corporations out of active business income. There is no change to the taxation of eligible dividends paid by most public corporations.

Small corporate business owners planning to sell their business got a pleasant surprise in the budget when Mr. Flaherty increased the capital gains exemption for qualified share sales to $800,000 from $750,000 effective for 2014.

The Finance Minister seemed somewhat preoccupied with closing tax loopholes and stopping international tax evasion and ensuring compliance with the filing of the Foreign Verification Form T1135. To that end, the CRA will launch the Stop International Tax Evasion Program, or the more appropriately named “International Snitch Program”. Under this program, the CRA will pay rewards to individuals with knowledge of major international tax non-compliance when they provide information to the CRA that leads to the collection of outstanding taxes due. The CRA will require the outstanding tax liability to be in excess of $100,000 before entering into such a contract. The reward will provide for payment of up to 15% of the federal tax collected.

Therefore, please be advised, I will not be writing my blog anymore as I will be compiling my snitch list and retiring to Barbados on my 15% reward earnings (Just joking CRA, I have never met or heard of an international tax evader).

I provide a link to my firm, Cunningham LLP's budget summary (which I helped write) for those who want details of the budget.

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.