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Property Outside Canada

CRA Impose Hefty Penalties on Taxpayers

Date: June 2012

Canada Revenue Agency (CRA) has started to play hardball and automatically impose hefty penalties on taxpayers who do not file reports of foreign property and income by their tax return due date.

Ten years ago, the government decided to get serious about identifying Canadians with offshore investments and introduced new rules that required taxpayers to report specified foreign property holdings with a total aggregate cost of more than Can $100,000 on their personal income tax returns.

When it comes to knowing what you need to track and report, your tax return and Form T1135 — Foreign Income Verification Statement is a good place to start. First, the T1 tax return on Page 2 asks the question, «Did you own or hold foreign property at any time in the year with a total cost of more than Can$100,000?» If the answer is «Yes», then you need to complete Form T1135 and file it with your income tax return by the due date. It details the types and values of your foreign property.

What To Report

— shares of Canadian corporations on deposit with a foreign broker;
— funds in foreign bank accounts;
— shares of non-resident corporations held by the resident filer or on deposit with a Canadian or foreign broker;
— land and buildings located outside Canada, such as a foreign rental property;
— precious metals, gold certificates, and futures held outside Canada;
— interests in mutual funds that are organized in a foreign jurisdiction;
— debts owed by non-resident persons, such as government or corporate bonds, debentures, mortgages, and notes receivable;
— an interest in or a right to any specified foreign property;
— property that is convertible or that can be exchanged for a Right to acquire specified foreign property;
— an interest in a partnership where the share of income or loss of the partnership for non-resident members is 90% or more and the partnership holds specified foreign property;
— an interest in a non-resident trust or a non-resident trust deemed to be resident by section 94 of the Act (discretionary trust);
— patents, copyrights or trademarks held outside Canada;
— an interest in, or a right with respect to, an entity that is non-resident.

What Not To Report

— property used or held exclusively in the course of carrying on an active business;
— personal-use property (i.e., property used primarily for personal use and enjoyment, such as a vacation property used primarily as a personal residence);
— an interest in a U. S. Individual Retirement Account (IRA);
— shares of the capital stock, or indebtedness, of a non-resident corporation that is a foreign affiliate;
— an interest in, or indebtedness, of a non-resident trust that is a foreign affiliate;
— an interest in a non-resident trust that neither you nor a person related to you had to pay for in any way;
— an interest in a non-resident trust principally providing superannuation, pension, retirement or employee benefits primarily to non-resident beneficiaries, that does not pay income tax in the taxing jurisdiction where it is resident;
— an interest in, or a right to acquire any of the above-noted excluded foreign property.;
— property in your RRSP, RRIF or RPP;
— corporations;
— mutual fund corporations;
— non-resident-owned investment corporations;
— corporations exempt from tax under Part I of the Act;
— a registered investment under section 204.4 of the Act;
— trusts;
— mutual fund trusts registered in Canada that contain foreign investments;
— trusts described in paragraphs (a) to (e.1) of the definition of trust in subsection 108(`1) of the Act;
— trusts exempt from tax under Par 1 of the Act;
— a registered investment under section 204.4 of the Act;
— a trust in which all persons beneficially interested are either corporations or trusts listed above;
— partnerships;
— partnerships all the members of which are corporation or trust referred to on page 12;
— partnerships where the share of the partnership's income or loss for non-resident members s 90% or more of the income or loss of the partnership;
— persons (other than corporations or trusts) such as a vacation property personal property such as works of art, jewellery, rare folios, rare manuscripts, rare books, stamps, and coins.

Penalties For Late Filing

CRA automatically levies penalties of $25 per day (minimum $100) a maximum of $2,500 with interest accruing until the penalty is paid, for not filing an annual Foreign Income Verification form on time. But if you actually knew or should have known that Form T1135 was required and still filed late, there is a further penalty of $500 per month for up to 24 months ($12,000 maximum), after 24 months, there is an additional penalty which (if greater) increases the total penalty to 5% of unreported amounts compounded failure to report the income on these investments on your return would attract additional penalties.