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Banka: Stance toughening on foreign investment tax loopholes
Canada has aligned with the thinking of other countries around the world in battling against international tax avoidance.
As the treaties that Canada has with other countries come up for renewal, exchange of information agreements are being added to updated treaties while exchange of information document agreements are being drawn up with non-treaty countries.
While people search for tax havens or other methods to avoid paying tax, our ability to provide public services normally paid for by those taxes is being eroded.
This has become an international issue bringing foreign governments together to try to stop the lack of disclosure of taxable income by exchanging information about their citizens between the countries.
Canada has 90 tax treaties and 16 exchange of information documents now in force with three just recently signed and another 11 under negotiation.
Tax evasion occurs when someone deliberately ignores a specific part of the law by under reporting taxable income or claiming expenses that are not deductible or overstated.
Non compliance with the legislated reporting requirements is also considered tax evasion and has criminal consequences.
On the other hand, tax avoidance happens when actions are taken to minimize tax.
These actions might be within tax laws, but can contravene the object and spirit of those laws found in the ‘grey areas’ of our tax legislation .
The Canada Revenue Agency works continuously to uncover unexpected loopholes and closing them up.
Canada and the U.S. signed an intergovernmental agreement on Feb. 5, 2014, to improve tax compliance between the two countries.
The agreement stipulates that the Canadian financial institutions will have to take new steps to verify whether an account holder is a U.S. person for U.S. tax purposes.
This information will be forwarded to the Canada Revenue Agency who will then forward it to its counterpart in the U.S., the Internal Revenue Service. Form T1135 has been in existence in Canada for many years.
This form is used when a Canadian resident’s foreign holdings exceeds $100,000 at any time during the year.
As Canadians, we are taxed on worldwide income, so any income earned outside of Canada must be reported on our Canadian tax returns.
If we have already paid foreign tax, we will receive a credit for the foreign tax paid on our Canadian income tax returns.
The items that are required to be reported on form T1135 include amounts in foreign bank accounts, shares in foreign companies, interests in non-resident trusts, bonds or debentures issued by foreign governments or foreign companies, interests or units in offshore mutual funds, real estate situated outside of Canada, other income earning property.
Items that do not need to be reported include personal use property, such as a vehicle, vacation property, jewelry, art work or any assets used in an active business such as inventory, building or equipment.
For individuals and corporations, the form is due to be filed on the same day as the tax return.
For corporations it would two, three or six months after the fiscal year end date and for individuals it would be either April 30 or June 15.
For partnerships, it would be due the same date that the partnership return is due.
If the information is not filed, there are several penalties that can occur.
The first one is the failure to comply which is a fine of $25 per day up to 100 days being a minimum of $100 and a maximum of $2,500.
In the case of gross negligence (not realizing that you need to file the information) the fine is $500 per month for up to 24 months to a maximum of $12,000.
After 24 months, the penalty becomes five per cent of the cost of the foreign property.
Eventually you may receive a ‘demand to file’ and if you fail to comply with the demand, the penalty is $1,000 per month up to 24 months up to a maximum of $24,000 when it then becomes five per cent of the cost of the item that triggered the demand.
If you knowingly file a false return or intentionally leave items out of a return, the penalty would be the greater of $24,000 or five per cent of the value of the omitted amount.
So the penalties of not reporting foreign investments can be quite steep.
Please note that more due diligence will probably be undertaken by your tax preparer to make sure that you comply with the enhanced reporting requirements with respect to foreign investments and holdings.
The Canada Revenue Agency website has some detailed examples of the kinds of items that are required to be reported on the T1135.
Please go to www.cra-arc.gc.ca and in the search box type T1135 for more information.