Monday, March 24, 2008
What you don't know won't hurt you - as long as we are not talking about income taxes. This isn't intended to scare you, but you could be sitting on a ticking time bomb if you own foreign property.
For the past 10 years (since the 1998 tax year), the Canada Revenue Agency (CRA) has been asking if you own any foreign property that cost you more than Cdn$100,000. The question is on page two of your tax return. If the answer is yes, you have to file Form T1135 with your tax return. If you e-file, you still have to mail in your Form T1135.
This question is the taxman's way to up the ante when it comes to uncovering tax evasion that uses offshore tax havens to hide money. If you answer this question dishonestly, you place yourself in double jeopardy. When you get caught, you could be penalized for the unreported foreign income and for not filing Form T1135.
The penalties for tax evasion could be a fine or jail time, depending on the circumstances. Penalties for not filing T1135 are hefty - $25 per day or a maximum of $2,500. And that's for each year of not filing!
What is foreign property? The devil is in the details so please read Form T1135 and its accompanying notes to cover your bases. Some common examples include cash, stocks, mutual funds, loans and land and buildings not in Canada.
Let's zoom in. You own a bank account in the U.S.? That's definitely a foreign property and you need to file T1135 if the cost amount is more than Cdn$100,000.
You moved to Canada a few years ago and still own a home in, say, Australia. Is that Australian home a foreign property? It depends. It is if the property is rented to a third party. It isn't if you maintain that property for your personal use. If it is rented, and was worth more than Cdn$100,000 at the time you came to Canada, you should have been filing the Form T1135.
If you own mutual funds through a Canadian mutual fund provider, i.e., Sun Life, ManuLife, Investors Group or a Canadian financial institution, you are not considered to own foreign property, even if your mutual fund invests entirely in foreign stocks.
If a relative in a foreign country died and left you with more than Cdn$100,000 which remains in a foreign institution, you are considered to own foreign property and will have to file Form T1135.
This is where most of you are supposed to file Form T1135 and don't know it. If you invest more than Cdn$100,000 - at any time during the year - in stocks of foreign corporations (i.e., stocks of U.S. corporations) through a broker or an Internet account, you have to file Form T1135. Stocks of foreign corporations are foreign property. If that's you, and you have failed to file Form T1135, you are sitting on some potential hefty non-reporting penalties.
Unfortunately, coming clean by mailing in a previous year's Form T1135 with a remorseful apology isn't the way to go. You could still be nailed with hefty late-filing penalties. Your best option for submitting a late Form T1135 is through CRA's Voluntary Disclosure Program, which grants amnesty from late filing penalties. Caution: The CRA Voluntary Disclosure Program is not a do-it-yourself project. It is recommended you seek professional assistance.
Details on Foreign Property reporting are found on the CRA website.
Andy Wong is a tax consultant at MacKay LLP, Chartered Accountants in Yellowknife. He can be reached at firstname.lastname@example.org.