Apple CEO Tim Cook speaks during Apple's "It's Glowtime" event in Cupertino, Calif., Sept. 9, 2024. Foreign property includes foreign stocks, such as Apple Inc., Microsoft Corp. or Meta Platforms Inc., for example. But the key is, you have to claim it. (Credit: NIC COURY)
As you begin to prepare your 2024 tax return in the days ahead, you should pay close attention to a seemingly innocuous question on page 2 of the return. The question asks whether you owned or held “specified foreign property” where the total cost amount of all such property, at any time in 2024, was more than $100,000. If the answer is yes, the return instructs you to complete Form T1135, Foreign Income Verification Statement.
There are substantial penalties for failure to file this form, as one taxpayer recently found out in a tax case decided last month. But before delving into the details of this latest T1135 penalty case, let’s briefly review the foreign property reporting rules.
Specified foreign property includes obvious foreign assets, such as a Bahamian bank account or Bermudian offshore investment portfolio, as well as precious metals held outside Canada. Also included are foreign stocks, such as Apple Inc., Microsoft Corp. or Meta Platforms Inc., debt of a non-resident issuer, or an interest in a non-resident trust held in a Canadian, non-registered brokerage account. Options to purchase specified foreign property are also included.
If you hold foreign securities in a Canadian brokerage account, consider the residency of the issuer of the security. If the issuer is a non-resident of Canada, then the securities count as specified foreign property. Note that it’s irrelevant whether the security is listed on a Canadian or foreign stock exchange, or if the security is denominated in Canadian or foreign currency.
Some foreign assets do not need to be reported. For example, foreign securities held inside Canadian pooled products, such as Canadian mutual funds, need not be reported; however, if you invest in a non-resident mutual fund or exchange-traded fund (ETF), then that’s foreign property. A foreign currency bank account held with a bank in Canada such as a U.S. dollar chequing account isn’t considered specified foreign property, nor are U.S. cash balances sitting in your non-registered Canadian brokerage trading account. Only cash in offshore accounts, for instance an Arizona chequing account, is reportable foreign property.
If you own a foreign vacation home, such as a condo in Costa Rica, it’s excluded provided it’s primarily for your personal use. A rental property located outside of Canada would, however, be included in assets to be reported.
Finally, property held in registered plans, such as a registered retirement savings plan (RRSP), registered retirement income fund (RRIF) or tax-free savings account (TFSA), as well as foreign property used exclusively in carrying on an active business, need not be reported.
If you are required to file a T1135, it’s important that you file on time or risk a late-filing penalty of $25 per day to a maximum of $2,500, plus arrears interest. If, however, you fail to file the T1135 “knowingly or under circumstances amounting to gross negligence,” the penalty jumps to $500 per month for each month that the return is late, to a maximum of $12,000. After 24 months, the penalty becomes five per cent of the cost of the foreign property, less any penalties already assessed.
This latest T1135 case involved a taxpayer who neglected to file T1135s for the years 1998 through 2013, and was hit with gross negligence penalties and interest for each of those tax years.
The taxpayer had a bachelor of science in mining engineering and was a professional engineer. He worked in Canada from 1979 to 1982, and then worked in Libya as an engineering supervisor until 1994.
In April 1997, when the taxpayer was contemplating his return to Canada, he opened a Swiss bank account and funded it with the equivalent of $431,000 in Canadian dollars that he had earned in Libya. It was a numbered Swiss account and, for a fee, the Swiss bank held all related documentation. All business transacted between the taxpayer and the Swiss bank was by telephone. He opened the Swiss bank account to hide the funds from his wife, with whom he was having marital difficulties. He was concerned that he would soon be divorced so he wanted to keep money offshore to fund his potential post-divorce life.
The taxpayer ultimately returned to Canada and became a Canadian resident for income tax purposes. He did not report any of the income, gains or losses for the Swiss bank account in his tax returns for any of the 1998 to 2013 taxation years, nor did he file T1135s for those years.
The CRA reassessed the taxpayer for those taxation years to include in his income amounts in connection with the Swiss bank account, and imposed both gross negligence penalties, and penalties for the failure to file T1135 forms.
For each year from 1998 to 2013, the taxpayer’s accountant prepared his income tax return based on the documents provided by him. The taxpayer did not disclose the existence of the Swiss bank account to his accountant, nor did he provide his accountant any documentation in relation to the account for those taxation years.
The taxpayer testified that he believed that since he had earned the money used to fund the Swiss bank account while he was working in Libya, it was not taxable in Canada. He referred to provisions in two of Canada’s income tax treaties that show the complexity of the taxation of internationally earned income. He also argued that he had understood that the Swiss bank was taking care of any tax associated with that account. This was consistent with his experience in Libya, where his employer took care of all taxes.
The judge didn’t buy the taxpayer’s explanations, saying, “None of these reasons are convincing.” Added the judge, “This is not a situation where it could be said that the taxpayer was misled by their tax preparer. It was not a complex structure or an arcane point of tax law — the taxation of Canadian residents on their worldwide income is one of the foundational rules of Canadian income tax law.”
Accordingly, the judge found that the taxpayer failed to file a T1135 form for each of the 2007 to 2013 taxation years “knowingly or under circumstances amounting to gross negligence,” and that the CRA properly assessed the gross negligence penalties for failure to file each year’s T1135.
Even for those of us without Swiss bank accounts, this case serves as an important reminder to fill out the T1135 annually, even if it’s merely to report the U.S. securities in our Canadian brokerage account.
Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.
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