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Tax Tips and Pits - Form T1135: Owning up to the taxman
Introducing little known form T1135: the Foreign Income Verification Statement. You may recall in the past when you filed your tax return you answered the question, “Did you own foreign assets of $100,000 or more this year?” This question has been on the T1 tax return for years and until recently, didn’t appear too terribly important.
Last year’s Federal Government’s budget has placed this form front and center as it tries to identify, track and tax Canadian’s foreign assets worth $100,000 or more.
This reporting should not be confused with the necessity for Canadian’s to report worldwide income on their tax return. Rather, form T1135 requires the disclosure of foreign owned assets that may or may not be earning income.
It includes amounts deposited in foreign bank accounts, shares in foreign companies, interests in foreign trusts, foreign bonds, units in offshore mutual funds and, of course, real estate – even vacant land.
However, exempted are assets to operate a foreign business and also personal use property - things like vehicles, artwork, jewellery and vacation property.
But in the case of vacation real estate that is rented, CRA clearly states that the Canadian taxpayer/owner must not have an expectation of profit. In other words, any rental revenue generated must be incidental to owning the property and act only to offset expenses associated with that property.
By extension, this means foreign real estate worth $100,000 functioning mainly as a rental property must be reported as an asset on form T1135.
As an aside, rental revenue and expense in either case must be reported on schedule T776.
For the purposes of form T1135, the value of a capital asset is its original purchase cost plus the cost of improvements made to it over time. The current market value is not the determining factor regarding the use of this form.
The amount of a down payment used to purchase an asset is irrelevant. An asset costing $100,000 or more, whether involving a down payment with a mortgage or loan, has to be reported at the full purchase cost.
In the case of joint ownership of an asset, the value is divided proportionately to each party’s investment. So if an asset is $150,000 and one person had invested $110,000 that person has to report their portion on form T1135 but the other doesn’t. The $150,000 cannot simply be split 50/50 and neither person report. This makes for an interesting calculation when it comes to a couple.
If several lower valued assets aggregate to $100,000 then the group of assets has to be reported.
Form T1135 has to be filed by April 30 for individuals, and for corporations it must be filed by that corp’s regular tax filing due date. And while on the topic of filing, despite the electronic world we live in that makes tracking and taxing things like foreign assets possible, form T1135 cannot be e-filed. It has to be signed and mailed to CRA.