Each year I help over 500 clients file their Canadian and US tax returns as well as plan for both their Canadian and US investment accounts. I also regularly help new US clients plan for their move to Canada.
In addition to income reporting tax forms we also need to complete informational reporting forms for our clients. One example of such forms is form T1135 – foreign income verification statement.
What is Form T1135?
According to CRA’s official website the first iteration of the T1135 was released in 1999. This form was implemented in order to ensure Canadian tax residents report income from non-Canadian foreign accounts. This form reports foreign assets fair market value, cost basis’ and income related to these foreign accounts. Because non-Canadian based investments are not reported to CRA like Canadian based investment accounts are (via T5 and T3 slips) CRA requires taxpayers to voluntarily disclose their foreign assets to better increase the likelihood of taxpayer compliance.
Page 2 of your Canadian tax return will ask a question related to whether you are required to prepare and file the form. Note however that this form does not need to be completed if the total cost of your foreign property does not exceed $100,000:
We’re not certain how much of the information reported on the T1135 is used by CRA to audit or review a taxpayer’s situation. In my experience we see very little queries from CRA on T1135s that are filed with the department. However that could change at a moment’s notice.
Who has to file form T1135?
Any Canadian resident taxpayer (including corporations, partnerships, trusts and deemed resident trusts) are required to file form T1135 if their total overall cost of foreign property exceeds $100,000 CAD.
Note that some taxpayers may have a Canadian tax basis greater than their historical cost because of certain adjustments such as moving to Canada or transfers from family members. Make sure to consult your tax accountant to ensure you fully understand whether you need to file the T1135 or not.
How to complete form T1135?
In some cases preparing form T1135 can be quite straight forward, however for those with foreign investments with a cost that exceeds $250,000 the filing requirements are much more onerous.
Let’s start with a simple example…
If Jane has regular US investments in a US brokerage account such as Fidelity, UBS or Charles Schwab (non-IRA, 401k or ROTH accounts) with a cost that exceeds $100,000 she will be required to complete and file from T1135. Jane also have a US rental property and a vacation property that she does not rent. In addition to the US assets and real estate Jane also have a non-registered investment account in Canada that holds some US stocks.
However, because her investments have a cost less than $250,000 she is eligible for the simplified method of T1135 reporting. Let’s first review the first part of the form that needs to be completed for the simplified and more detailed version of the form:
In the identification section you outline the following filing information:
- type of filer, e.g individual, corp, trust or partnership
- Name and address
- Social insurance number or other tax identification number
- Year end being reported
- for individuals this will always be calendar, however for corporations or trust these may be off-calendar periods
- For individuals you’ll need to check either 1 or 2 which represents whether the taxpayer is self-employed or not. Choose 1 for self-employed and 2 for non self-employed.
At the bottom of the identification section you’ll need to outline if the cost of your investments exceed $100,000 or $250,000. This will dictate whether you have the option of filing under the simplified reporting method.
Based on Jane’s fact pattern outlined above and assuming the cost of her assets are under $250,000 she will be eligible for the simplified method of reporting. Therefore only Part A will need to be completed.
This simplified section is very similar to the previous versions of the T1135 that did not require such detail. You can view an older copy of the T1135 here.
For Jane she will likely only need to check the “funds held outside Canada”, “shares in non-resident corporations”, “real property outside of Canada” and “property held in Canadian registered investment accounts” (for the US stock in the Canadian investment account).
She then only needs to outline in which countries these investments are held and the income and gain loss from all the foreign property.
However, if we assume that Jane’s investments have a cost of more than $250,000 her requirements will be much more onerous. In this case she will be required to complete Part B of the form:
As you can see from Part B above the filing requirements are much more complex for those that hold investments with a cost that exceed $250,000. If we assume that her cost now exceeds $250,000 her reporting will be as follows:
- Part A will not be required
- For Part B:
- For any cash or funds outside of Canada she’ll need to describe the assets including the country code maximum funds at year end and year end fund amounts. Note: there is an option to report the funds and investments under their functional currency under section 261(3)(b) of the Canada Income Tax Act. However in most cases the amounts will be converted to CAD. As a general rule, year-end amounts are converted at the year end exchange rate and income amounts are converted at the average conversion rate for the year.
- Next Jane will list the securities (stocks, bonds and other) held in the US non-registered investment accounts (Part B #2). Note: as discussed below, IRA, ROTH IRA and 401k accounts do not need to be listed on the T1135. In #2 Jane will need to list the name of the security, country code, maximum cost during the year and at year end, gross income and any gain/loss on the security. As you can imagine the amount of work that goes into actually calculating and tracking max cost and year end cost of each security is significant. This is one of the reasons why I advise clients to move their US investments into a Canadian brokerage account whenever possible (more on this below).
- #3 and #4 are much less common for clients. If you have financed a non-resident with debt or acquired interest in a non-resident trust (not including regular trusts that you are a beneficiary of) you may have to complete these sections
- #5 is where you will be reporting your US real estate holdings. Note however that personal use real estate does not need to be included on #5
- #6 will be reserved for any other property that is not specifically referenced in any of the other sections
- #7 is much more common for Canadians with US security holdings. As mentioned above, if a taxpayer holds US investments in a US investment account located in the US they need to complete the much more involved and complicated section under #2. If these US investments are held in a Canadian brokerage account the requirements are much more straight forward. In most cases your Canadian broker will provide a statement with all the information required to complete #7. As you can see from the section, securities only need to be completed on a country by country basis and not an asset by asset basis
The final section of the form simply outlines the information of the individual signing the form and the firm/individual actually preparing the form:
What is the due date of the T1135
This year was different given all of the Covid tax deadline extensions, however in regular years the deadline to file the T1135 will be the same as your actual tax filing deadline. Therefore those that are not self-employed need to file their T1135 by April 30th and those that are self-employed need to file it by June 15th.
How do I File Form T1135?
You really have 2 options:
- Prepare the form manually and mail it to CRA
- Prepare the form (or have it prepared by a qualified CPA) electronically using software and e-file the form using the CRA e-file protocols.
For those that choose to mail in the form it can be mailed to the following address:
Winnipeg Taxation Centre
Data Assessment & Evaluation Programs Validation & Verification Section Foreign Reporting Returns 66 Stapon Road
Winnipeg MB R3C 3M2
What happens if I file the T1135 late? Is there a penalty?
Yes, there is certainly a penalty for any T1135 form that is filed late. The penalty for late filing of the T1135 is $25 a day to a maximum of 100 days or $2,500 plus interest for that period.
In most cases however taxpayers tend to completely miss the T1135 and therefore the maximum penalty is almost always assessed.
There is an opportunity however to submit the late T1135 forms under the CRA voluntary disclosure program. Under this program, if you are eligible you may be able to submit the forms without incurring any penalties.
Note that the $25 a day penalty is not the only penalty CRA has the ability to levy. Depending on the particular fact pattern and intent of the taxpayer CRA could levy additional penalties. Please see the table below for a full list of potential penalties.
Note that if you intend on filing your T1135 forms late (especially multiple years) make sure to consider submitting the forms under the CRA VDP program. If not, CRA will automatically assess penalties and your only recourse will be to try and have the penalties abated under the CRA Taxpayer relief provisions.
What are some exceptions to filing form T1135?
Other than actually being below the foreign asset cost threshold of $100,000 CAD there is only one other exception from filing the T1135. Taxpayers get a first year exemption from filing their T1135 in the first year they become a tax resident of Canada. Note however that this only applies to new residents and not those that were Canadian tax residents in prior years.
Do I have to report my IRA, ROTH IRA or 401k on the T1135?
The instructions to the T1135 include several noted exceptions to what types of investment accounts need to be reported. Namely IRA, ROTH IRA and 401k accounts do not need to be reported on this form.
Also, other than a foreign trust in which the taxpayer actually acquired interest in, distributions and indebtedness from a foreign trust should be reported on form T1142 and not the T1135.
As you can see from the discussion above the preparation and filing of the T1135 is quite involved. However that’s doesn’t mean you should be intimidated by the filing requirement. In most cases, assuming that your investment are all in Canada, the filing requirements are quite straight forward.
Only in cases where you have portfolio investments outside of Canada so these requirements get significantly more complicated and you should seek professional cross-border tax help.
If you have questions about the T1135 requirements or want to discuss how you can move your US investments to Canada to help mitigate complex foreign asset disclosure calculations please reach out to me at 250-661-9417 or via email at email@example.com and I’ll be glad to help.