Canadian Holding Corporations and Individuals: Avoid Costly Foreign Asset Reporting Pitfalls

Foreign Asset Reporting Pitfalls for Canadian Holding Corporations and Individuals

Canadian taxpayers, individuals, and corporations who hold foreign property exceeding $100,000 in cost at any time during the year, have significant foreign asset reporting obligations. Not only is the reporting obligation an annual requirement, but the penalties for non-compliance can be very steep.

Foreign Asset Reporting Obligations

Your foreign asset reporting obligations are indicated on the T1135 “Foreign Income Verification Statement” as part of your tax return, for which a revised version requiring additional information is applicable to tax years ending on or after July 1, 2013. The revised version can be very costly to complete accurately and completely, and the professional accounting fees for completing this form could potentially be even higher than the cost of preparing the tax return itself. The T1135 reporting requirement is for Canadian individuals as well as Canadian corporations.

The penalty for failing to file the T1135

The penalty for failing to file the T1135 is $25 per day for up to 100 days (minimum $100 and maximum $2,500). This penalty is not crippling in itself but if CRA can prove gross negligence or if a demand to file this form is ignored, the penalties would be significant.

The definition of foreign assets that qualify as needing reporting can be confusing but the fact that a mere $100,000 cost base would require filing should be enough to awaken all corporations that invest their retained earnings.

For example, many successful operating businesses and professional corporations have excess cash, which has been invested in various type of securities with banks and brokerage accounts. With the T1135, owning commonly held shares such as Apple or Starbucks with cost base in excess of $100,000 would require a T1135 filing. Similarly, holding U.S. Treasury Bills in excess of a $100,000 cost base would require a T1135 filing.

Similarly, with individuals, the same assets rules apply, but fortunately many Canadian taxpayers hold investments in their RRSP and TFSA accounts. The investments in these accounts are not affected by the T1135 filing requirements. However, many older Canadians have more than $100,000 invested in their non-registered accounts, which would require a T1135 requirement assessment. The low threshold for reporting affects many Canadians.

Interestingly, the requirement to file the T1135 has been in place since 1999. The current noise is due to the requirement for more detailed reporting, which will increase the cost of compliance for many average Canadians. Another problem with the T1135 is that this document requires paper filing in an age where many personal and corporate tax returns are being electronically filed. The paper filing requirement of course creates an opportunity to unintentionally forget to file the document after the tax return has been electronically accepted.

A corporation or an individual that finds itself offside with the T1135 filing can always use the CRA’s Voluntary Disclosure Program to disclose the unintended error and avoid penalties. This of course incurs further professional fees.

Given the complexities, intricacies, and penalties associated with complying with the existing foreign asset reporting requirements, it is wise to use professional tax advisors at a Vancouver accounting firm to deal with all your tax matters.

If you have any questions on Foreign Asset Reporting or would like to know how your local Vancouver Chartered Accountant can help, contact us. Follow our Vancouver Chartered Accountants Tax Tips Blog for more useful tips and advice.

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