Form T1135—what's all the fuss about?

Form T1135 is designed to help the Canada Revenue Agency (CRA) obtain information on the amount of certain types of assets outside Canada that are held by Canadian residents.

The form went through a number of changes over time. The ability to EFILE it continues to expand with this option now available to trusts along with individuals, corporations, and partnerships. Given the form's current stable state, we'll review key requirements, definitions, and challenges related to its completion.

Who's required to file form T1135?

All Canadian resident taxpayers who, at any time in the year, owned specified foreign property (SFP) with a total cost amount of more than $100,000 (Canadian), even if some or all of the SFP was sold before the end of the year, must file form T1135. This requirement applies to individuals, trusts, corporations, and partnerships, subject to a few exceptions.¹

What’s SFP?

Specified foreign property is defined in the Income Tax Act and includes:

• amounts in foreign bank accounts
• shares in foreign companies, even if held in a Canadian brokerage or through a separately managed account (SMA)
• shares of Canadian corporations held outside Canada (e.g., in a brokerage account in another country)
• interests in non-resident trusts
• debts owed by non-residents, including bonds and debentures issued by foreign governments or foreign corporations
• life insurance policies from a foreign issuer²
• property that’s convertible into, exchangeable for, or confers a right to acquire a property that is specified foreign property (e.g., a call option, stock options, or restricted stock units to acquire shares in a foreign corporation³)
• interests in foreign mutual funds
• real estate outside Canada (unless mainly held for personal use and enjoyment)
• other tangible and intangible property outside Canada, such as patents, copyrights, precious metals, gold certificates, and futures contracts

Specified foreign property does not include:

• property used or held exclusively in carrying on an active business
• property held in a registered Canadian plan, such as a registered retirement savings plan (RRSP), registered retirement income fund (RRIF), registered pension plan (RPP), registered education savings plan (RESP), registered disability savings plan (RDSP), tax-free savings account (TFSA), or first home savings account (FHSA)
• personal use property (e.g., car, vacation property, jewelry, artwork, etc.)
• assets in certain foreign retirement accounts, such as a U.S. 401(k) or an individual retirement account (IRA)
• interests in or a right to acquire any of the above-noted excluded foreign property
• interests in Canadian registered mutual funds (trusts and corporations), exchange-traded funds (ETFs), and segregated funds regardless of the underlying fund assets

Changes to form T1135 over time

There has been no change in who has to file the form, what property must be reported, or the $100,000 cost threshold. Furthermore, form T1135 remains purely a disclosure form and doesn’t calculate your tax liability.

Prior to 2013, completing form T1135 was a relatively simple exercise. A taxpayer only had to indicate the type of SFP owned, a range of the total cost (literally a tick of a box), country of location, and total the amount of income reported in the income tax return related to these properties.

After 2014, if the total cost of the SFP is less than $250,000 throughout the year, form T1135 provides for a simplified reporting method. This reporting method allows taxpayers to simply check a box for each type of property held, indicate in which countries most of the SFP is held, and give the total income from all SFPs, as well as the gains or losses from any disposition of SFP.

However, if the total cost of the SFP is $250,000 or more at any time during the year, detailed information is required for each SFP, including:

• the name of the foreign entity holding the funds, foreign corporation, or foreign trust, or a description of the foreign property
• the country where the foreign asset is located
• the highest cost amount of each property during the year and the cost amount at year end
• the amount of income or loss and the amount of capital gain or capital loss realized from the SFP during the year

Depending on the amount of foreign assets and the information available, this can be a time-consuming and challenging exercise, one that can result in significant fees if paying someone to prepare the form.

Aggregate reporting method

Recognizing the challenges in completing the revised form T1135, the CRA allows for an aggregate reporting method. For 2015 and later taxation years, an investor who holds SFP in an account with a Canadian registered securities dealer may now report the aggregate value of all such properties on a country-by-country basis instead of reporting the details of each property. In addition, the total value of all such qualifying foreign property to be reported is the highest fair market value (FMV) at the end of any month during the year in addition to the FMV at year end, as opposed to reporting the highest cost amount of each property during the year and the cost amount at year end.

Also, a taxpayer still has to report the total income (or loss) earned in the year and the gain (or loss) realized from all dispositions during the tax year for all such property.

This aggregate is reported in category 7 on form T1135, “Property held in an account with a Canadian registered securities dealer or a Canadian trust company.”

Challenges in preparation

The increased level of disclosure and changes generally has created a number of challenges in completing the form.

Cost amount

The cost amount generally means the adjusted cost base (ACB) of the property. Calculating the ACB can be difficult and the ACB of a property may change over time. Partial sales or redemptions, subsequent deposits, distributions of return of capital, dividend reinvestments, capital improvements to real estate, and the application of the superficial loss rules—to name a few examples—can all impact the ACB.

If two people are joint owners of SFP, they’d need to include their share of the cost amount of the property. For new immigrants, the cost amount is the fair market value (FMV) of the property at time of immigration. For a gift or inheritance, the cost amount is the FMV on date of receipt.

Determining a corporation’s country of residence

Remember: it’s the country of residence of the corporation that’s relevant and this isn’t necessarily the same as the stock exchange the security is listed on. For example, consider American depositary receipts (ADRs). These are stocks that trade on a U.S. stock exchange but represent shares of a foreign corporation. You must look at where the corporation actually resides and not the fact that it’s listed on a U.S. stock exchange. Keep in mind that there are foreign corporations considered SFP that are listed on Canadian stock exchanges. There are also some Canadian companies that are traded on foreign stock exchanges but they aren’t reported on form T1135 because they’re usually considered Canadian property. However, shares of a Canadian corporation (wherever listed) held in a brokerage account outside of Canada are considered SFP. Many people are often surprised by this.

Complications with the aggregate reporting method

The aggregate reporting method requires disclosure on a country-by-country basis and eliminates the need to supply cost amounts. While this provides some relief in simplifying the reporting process, it raises a few challenges. The investment statements may not be presented on a country-by-country basis. For example, the investments may be listed by currency denomination. In that case, the taxpayer would need to sort through all of the investments and identify the country of residence.

Filing deadline

Form T1135 is due on the same date as the income tax return for individuals, corporations, and trusts.

Penalties

Failure to file form T1135 by the due date results in a penalty of $25 per day (subject to a minimum penalty of $100) to a maximum of $2,500. Additional penalties may result if the failure to file was done knowingly, or under circumstances amounting to gross negligence, or if it persisted after 24 months. More significant penalties apply to people who knowingly or under circumstances amounting to gross negligence make false statements or omissions.

As well, the period within which the CRA can reassess a tax return is extended by an additional three years (from three years to six years) if you fail to report income from SFP on your income tax return, and either form T1135 is filed late or income from SFP is reported incorrectly on the form. It’s important to point out that this extended limitation period allows the CRA to review the entire tax return for the year and doesn’t restrict their review to just income related to foreign property.

Completing form TT1135

Form T1135 has evolved over time, which caused some growing pains. As a result, CRA has created a robust "Questions and answers about Form T1135” web page to help tax filers. Still, keeping good records of all foreign holdings will be critical to reducing the time, frustration, and potentially the cost of completing this form. Errors or omissions, even if accidental, could result in penalties and could extend the reassessment period. Consequently, it’s important that Canadian residents complete the form correctly and file it on time. We recommend that you speak to a tax advisor.

Planning opportunities with non-registered assets

For clients who hold shares of Canadian corporations in a brokerage account outside of Canada, consider moving them back to a Canadian account. For those who hold shares of foreign corporations directly (including through an SMA), consider purchasing mutual funds, segregated funds, or Canadian-listed ETFs with a similar investment mandate. In both cases, these assets would no longer be considered SFP and wouldn’t have to be included on form T1135. Furthermore, if the total cost amount of your SFP now falls below $100,000, the form doesn’t have to be filed at all.

1 Certain exceptions to this rule include (but aren’t limited to) individual immigrants to Canada in the first year they become a Canadian resident (unless they were previously a resident in Canada), mutual fund trusts and corporations, and non-resident-owned corporations. 2 For a foreign life insurance policy, the cost amount would follow the normal rules for determining the adjusted cost basis of a life insurance policy for Canadian tax purposes. For more information, see “Foreign life insurance and T1135 reporting.” 3 The cost amount of the stock options or restricted stock units (RSUs) is frequently nothing since they’re usually granted at no cost to the employee. If the total cost amount of the employee’s other foreign property is less than $100,000, the threshold isn’t met and no T1135 reporting is required. However, if the total cost amount of the employee’s other foreign property exceeds $100,000, then the stock options and RSUs would need to be declared on the T1135 form even though the cost amount is zero.