In this summer of rain and floods, it was great to get some good news for a change from our friends at the Canada Revenue Agency. Or at least limited good news.
This is in the form of a partial simplification of Form T1135, Foreign Income Verification Statement, which had unfortunately become very complicated and unwieldy due to changes made in 2013.
Actually, these complications were proposed and a new form had been created, but was then delayed thanks to a huge backlash from tax preparers and taxpayers. CRA granted an extension on filing this form until July 31, 2014 (for 2013 tax returns) and allowed a summary instead of the agonizing level of detail proposed.
In the first week of July, CRA announced that some of this simplification will become permanent. However, items that could previously be left off the form must now be detailed. Let me explain.
Taxpayers who have more than $100,000 cost of “specified foreign property” will still need to file Form T1135, with more detail than in the past, but will have the option of aggregating (by country) the value of such property held with a Canadian registered securities dealer.
However, the ability to exclude items that have a T3 or T5 issued by the investment dealer on them has been removed. This was a great feature of the pre-2013 form.
CRA is on a serious hunt for Canadian taxpayers who may be hiding funds offshore and failing to pay tax on the investment income earned on these accounts.
Good for them – all of us should pay our fair share. If some taxpayers get a free ride, the rest of us must pay more, one way or another.
In my naivety, however, I’m not sure how any of us can hide income from CRA when T-slips are issued and sent to CRA.
As you know, CRA asks every year on page two of your personal tax return if “you own or hold foreign property” with a total cost of more than $100,000 Canadian. If the answer is yes, then you must file the aforementioned T1135.
Unfortunately, they fail to mention that this only includes “specified foreign property”, as defined in Section 233.3(1) of the Income Tax Act. Excluded from this list are such common foreign assets as vacation homes and other personal use assets (unless rented out for income) and assets used in an active business outside Canada.
Included in the definition of “specified foreign property” are foreign bank accounts, investment accounts, shares of foreign companies, offshore mutual funds, bonds or income-producing foreign properties.
Also included are shares of U.S. or other foreign companies held in Canadian securities dealer accounts. These are “specified foreign property”, so they count toward the $100,000 threshold and must be listed on the T1153.
The amount that must be included on the new form is the highest fair market value (FMV) of such investments at the end of any month during the year, in addition to the FMV at year end. You will also have to report the aggregate income for the year, and the gain or loss for the year on all dispositions.
These are CRA rules, and have nothing to do with the IRS.
I applaud CRA for listening to the tax community and making the changes they have made. However, I think I would still like to see the T-slip exemption re-instituted.
The new rules will add complexity and time to tax preparation. Perhaps the increased disclosure requirements will reveal taxable dispositions that taxpayers had previously hidden, and net some previously unpaid taxes.
However, I am still skeptical that many people intentionally cheat on reporting capital gains on investments held with securities dealers, when these institutions disclose all info to CRA. If so, they are pretty unwise.
Please enjoy summer, as it appears to have finally arrived.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.