Remind clients to report offshore investments

Advisor's Edge

2016-06-24


The release of the Panama Papers earlier this spring serves as a reminder to investors to disclose certain offshore investments by filing Form T1135—Foreign Income Verification Statement.

If clients owned foreign investments whose total cost exceeded $100,000 at any point in 2015, they were required to file the form, which was due May 2, 2016. If your client (or their spouse or partner) was self-employed in 2015, they both had until June 15, 2016 to file. (If their foreign investments’ total cost exceed $100,000 in 2016, their forms will be due May 1, 2017 or June 15, 2017).

Penalties for late filing Form T1135 are $25 each day beyond the deadline, up to a maximum of $2,500, plus interest. There have been more than a dozen cases in which taxpayers have been assessed the full penalty for the innocent non-filing of the T1135. Yet, despite all these reminders, another T1135 case (Samson et al v The Queen, 2016 TCC 115) came before the courts last month.

What happened?

The case involved a married couple, each of whom was assessed a penalty of $2,500 for each of the years from 2008 through 2011, for failing to file their T1135s. The couple argued that they were entitled to maintain a “due diligence defence” to the penalties. They also claimed “they were reasonable in their belief at the time that they did not have to report their foreign property and file T1135 forms for the years in question because they did not have any income tax payable for the year (as a result of losses claimed from their foreign and Canadian rental properties, which were unchallenged) and, hence, did not have to file T1 income tax returns.”

The issue was whether the taxpayers were “diligent in their compliance efforts and acted reasonably.”

The judge reviewed the evidence and arguments from both sides but had serious concerns about the taxpayers’ credibility. He found the husband to be “evasive” and that he “repeatedly deflected clear questions.” Further, the taxpayer preferred to blame others—his first bookkeeper, then his second bookkeeper, then his accountant—for his predicament.

The judge, in upholding the penalties, concluded there was “no reasonable basis to believe that the appellants were unaware of their obligation to file their 2007 T1135 form by April 2008 and in each of the years thereafter.”

When discussing T1135s with your clients who may not have been filing, you can remind them of the potential penalties for being non-compliant.

And tell them that Form T1135 has become a lot easier to complete than it was in prior years, as a result of consultations with various external stakeholders including the banking, accounting, legal and tax community.

Part A

Taxpayers who held foreign investment property with a total cost above $100,000, but below $250,000 throughout the entire year, can complete Part A of the form, known as the simplified reporting method. This method allows taxpayers simply to check the box for each type of property they held during the year, rather than providing the details of each property. Types of property include: funds held outside Canada, shares of non-resident corporations, indebtedness owed by non-residents, interests in non-resident trusts and real property outside of Canada (other than personal-use real estate), as well as “property held in an account with a Canadian registered securities dealer or a Canadian trust company.”

This last category of property would likely be the one most commonly checked off for someone with a non-registered Canadian brokerage account. Taxpayers are then asked to select the top three countries where they hold foreign property, based on the maximum cost of the property held during the year, and to enter those country codes. Finally, income from all foreign property, as well as any gains or losses from the disposition of any foreign property during 2015, must also be reported.

Part B

The second option, Part B, is the “detailed reporting method” and is similar to prior years. This option continues to apply if, at any time during the year, the client held foreign property with a total cost of $250,000 or more.

However, if they fall into this category and maintain an account with a registered Canadian securities dealer, they can use the “aggregate reporting method.” This method, reported in a table in Category 7 of the T1135, allows taxpayers to report the aggregate value of all foreign property on a country-by-country basis. The total value that must be reported is the highest fair market value at the end of any month during the year, in addition to the fair market value at year end. And, like above, the client must still report the total foreign income earned in the year, and the gain or loss realized from all dispositions of that property during the year. But that too must be on a country-by-country basis. Finally, if your client failed to disclose the existence of offshore accounts for a number of years, he should come clean by filing a voluntary disclosure with CRA. Note that he can’t file a voluntary disclosure for non-filing of the T1135 for the 2015 tax year until one year after the information is due, unless the 2015 non-filing is part of a series of prior years’ non-filings, all included in the same voluntary disclosure.