Foreign Reporting Requirements in Canada

Recently, International Consortium of Investigative Journalists’ (ICIJ) released an investigative report on the use of secret offshore accounts in Panama, for the purpose of tax avoidance by wealthy individuals, limited enterprises, limited partnership, and trust companies, around the globe. With progressive insight on the issue, many taxpayers have started paying attention to the development made by the Canadian Authorities to bring to the forefront those, local taxpayers, who have offshore assets or receive offshore income.

The law demands Canadian taxpayers (individuals, partnerships, corporations and trusts) to file ‘Form T1135’ and bring to light all the foreign income producing property owned by them, during anytime of the fiscal year. This law has been in place since 1998. The form name is ‘Foreign Income Verification Statement’, and it include details of the foreign income producing property if its value exceeds $100,000.

Foreign assets reporting through the ‘T1135 Form’ must be filed as required, otherwise the punishments involved could be back-breaking. The Income Tax Act defines the following type of properties, as ‘Specific Foreign Property’, worthy of mentioning in the Form:

• Funds, patents, and copyrights of different businesses held outside Canada;
• Tangible property owned outside Canada (amounts in foreign banks);
• Share of the corporations located inside Canada, held from outside of the country;
• Interest in non-resident trust
• An interest in a limited partnership which owns foreign property (however, if the partnership is self-regulatory and files T1135 Form itself then you’re not obliged to answer the authorities);
• Holding a convertible property which gives you the right to buy Specified Foreign Property;
• Interests in offshore mutual funds;
• Interests in foreign insurance policies;
• A debt owned by a non-resident in the form of bonds issued by foreign governments;
• Owning precious metals, gold certificates, and holding future contracts outside Canada.

From 1998 to 2013, the ‘T1135 Form’ undertook a single change in its basic design. However, in the taxation year of 2013, the arguments of this legal requirement were rescheduled with an inclusion of elevated details about the Specific Foreign Property. This made the completion of the form much more strenuous, than it used to be.

At present, there are a two-tier methods of reporting for Specific Foreign Property in Canada. One type applies to those who hold foreign properties of more than $100,000 but less than $250,000. The process is quite simple with only a few details to be provided to the authorities. The other process is a detailed reporting mechanism which apply to those who hold foreign property of more than $250,000.

Special attention should be provided to filing tax returns within due time. Negligence to meet the deadlines, in submitting T1135 Form, could lead to heavy penalties. Prolonged failures to submit the tax information can even result in criminal prosecution.

• On a Daily Basis: Failure to submit the form within the specific timeframe could inflict a punishment of $25 per day ($100 minimum and $2,500 maximum)
• On a Monthly Basis: In case you fail to submit the form, a monthly penalty of $1,000 will be imposed on you (maximum up to $24,000)
• On a Yearly Basis: a penalty of 5% on the total sum of foreign property held by the offender.

The Canadian Revenue Agency (CRA) have been very active lately, since finding out details of the international tax evaders residing in Canada. The authority intends to assert serious charges on the offenders who are unable to file ‘T1135 Form’ within prescribed time limits. Moreover, CRA’s Offshore Tax Information Program (OTIP) offers financial rewards (from 5% to 15% of the federal tax, if collection amounts to $100,000) to those who inform the authority about potential tax evaders.

This is a huge step forward and more improvised efforts are being incorporated into the planning and prosecution of the processes. In the year 2016, the Federal Budget provides an amount of $444 million over the next five fiscal years for the proper up keeping and implementation of their efforts. Recent developments have triggered the endeavors of Canadian Authorities to further their exertions and push all foreign property holders to comply with the law respectively pay their due amounts.

Canadian Government is making legislative changes to extend its reach beyond ordinary taxpayers. The Draft on the Legislative Proposal forwarded by the Department of Finance on April 15, 2016, demands thorough implementation of Common Reporting Standard (CRS). The Standard directs the financial institutions, inside Canada, to identify offshore income producing accounts and report to government authorities about them. The information, which the financial institutes are required to provide, includes account balances, interests, and dividend incomes generated by the properties.

With the proposed law enacted, the financial institutions will have time until July 1, 2017, to mainstream the process into their normal framework. At present, more than 90 jurisdictions have adopted the Common Reporting Standard (CRS) developed by Organizations for Economic Cooperation and Development (OECD).
Once operational, the framework will induce a better exchange of information between Canadian Authorities and other jurisdictions having implemented it. Canadian Government will be able to gather more information about the foreign property and income assets held by Canadian residents in those areas.

Disclaimer:
This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters. All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions. This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services. Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.