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To begin with, all of Canadians’ global income is taxable. To add to that, the tax law requires Canadian residents to register with the CRA for the Form T1135, Foreign Income Verification Statement which is also known as the foreign property reporting. Filing of this form is done yearly by all residents who are in possession of “specified foreign property” totaling more than $100,000 Canadian dollars.
Some of these specified foreign properties include real estate property, funds/investments held, accumulated, or placed out of Canada, shares and outstanding debts receivable from non-resident corporations, life insurance policy delivered by a non-native issuer and interest in a foreign organization. Individuals, trusts, and corporations should undertake T1135 filing, which has a similar due date as the income tax return. When it comes to partnerships, the due date for T1135 filing is usually the same date for filing the partnership information return.
It is paramount to understand that foreign property reporting is executed even when the taxpayer has no payable tax for the year. Failing to do this will get you a penalty ranging from $100-$ 2,500. The penalty for omissions/incorrect statements and gross negligence could either get to $24,000 or 5% of the value of the foreign property.
What are the recent modifications in Foreign Property Reporting?
In 2013’s federal budget, it was publicly acknowledged by the government that Canada is facing a serious problem with regards to aggressive international tax avoidance and evasion using offshore accounts. As a way of strengthening the CRA’s capability to unmask and combat this problem, the government effected these two changes linked with foreign property reporting, beginning in the 2013 tax collection year:
1. Extension of the usual reassessment period of a resident by three years whenever the taxpayer fails to record earnings from a specified foreign property on their income tax return and where Form T1135 is either not filed, late filed or has wrong information inserted pertaining to the external property.
2. Revision of Form T1135 so that it can incorporate comprehensive information specification in every section of a specified foreign property. This includes the proper name of the specific foreign organization, its location and foreign earnings gained from it.
What other measures has the CRA adopted?
The CRA has also been entitled with these two tools to better spot global tax evasion and aggressive tax elusion. They are:
1. International Electronic Funds Transfer (EFTs): Beginning in 2015, specific financial mediums such as banks were obliged to report EFTs of $10,000 or more, so that the CRA can use this information in effecting the Canadian tax law.
2. Offshore Tax Informant Program (OTIP): Starting the year 2013, the CRA grants financial rewards to individuals who offer information relating to extreme global tax non-compliance.
Can you correct your tax affairs?
Yes, you can. In the case where you unintentionally forget to file T1135 or miss to account for foreign income, it will be necessary to first identify if you qualify to pass admission to Voluntary Disclosure Program, which is still under the CRA so that you can make corrections or add missing information to your records.
If the CRA accepts the disclosure made in the VDP, penalization will not occur. Nonetheless, you will still be required to clear the taxes unsettled with compound interest.