The 1995 Federal budget introduced extensive foreign property reporting requirements including a proposal for reporting of specified foreign property costing $Cdn 100,000 or more. Many Canadians objected to the requirement that residents provide detailed annual reports regarding such property. As a result, the government delayed implementation of the reporting requirement and asked the Auditor General of Canada to undertake an independent review of the $100,000 specified foreign property reporting requirements.
On June 5, 1998, the Auditor General tabled his report and concluded that the reporting requirement was the most appropriate mechanism to enhance compliance with the laws that require reporting of foreign-source income. The Auditor General requested that the government consider modifications to the reporting rule in order to reduce the compliance burden and address taxpayer concerns. The government reviewed the report and has accepted the Auditor General's recommendation to continue with the requirement that taxpayers disclose foreign-based assets costing over $100,000.
Check-the-Box Form
In order to make it easier for Canadian residents to comply with this rule and to achieve a balance between the need for information and concerns raised during the review, Revenue Canada is streamlining the reporting system. The original detailed reporting form will be changed to a check-the-box format. The revised form will require taxpayers to simply check the box which accurately corresponds to the type, location and the range of investment levels and indicate the amount of income from the reported property. Taxpayers will no longer be required to provide specific details concerning each specified foreign property reported on the form. A check-the-box form should be less intrusive for many taxpayers and will address privacy concerns that were raised by some taxpayers.
Penalties Based on Cost of Assets
There are certain foreign income reporting penalties that are determined on the original value of assets at the time of purchase, the "cost of assets". These penalties are applicable in cases of intentional non-filing for more than 24 months and for intentionally reporting false information. Penalties for late filing, for failing to file, and for underreporting of income will be applied when reporting begins in April 1999.
Numerous concerns have been raised regarding the fairness of these penalties since Revenue Canada has not levied penalties on the cost of assets in the past. To ensure fairness, Revenue Canada will gauge reporting compliance to determine whether these penalties will be recommended to be repealed. This will be considered as part of a review of all foreign reporting requirements based on analysis of the first two years of filing under the rules. The 5% of the cost of assets penalty cannot be assessed during the review period, as reporting under these rules only begins in 1999. During the review period, Revenue Canada will emphasize educational and outreach activities to maximize voluntary compliance.
When and Who Must File New Form T1135
There is no longer a requirement to file in respect of the specified foreign property $100,000 rule for the 1996 and 1997 taxation years. This filing requirement begins in 1999 for the 1998 taxation year. Individuals, corporations, trusts and partnerships which own specified foreign property, the total cost of which exceeds $100,000 at any time during the year, will be required to file the new (as yet unavailable) Form T1135. Specified foreign property includes:
Foreign bank accounts, other indebtedness, shares of foreign corporations, real and other tangible property and intangible property situated outside Canada;
But excludes:
Property used or held exclusively in the course of carrying on an active business, funds invested in registered pension plans, personal-use property and shares in foreign affiliates.
Where the total cost of such foreign investment property does not exceed $100,000, taxpayers will nonetheless be required to include any income earned from the specified foreign property in their taxable income for the taxation year in which it is earned.
The information provided herein is for general guidance on matters of interest only. The application and impact of laws, regulations and administrative practices can vary widely, based on the specific facts involved. In addition, laws, regulations and administrative practices are continually being revised. Accordingly, this information is not intended to constitute legal, accounting, tax, investment or other professional advice or service.
While every effort has been made to ensure the information provided herein is accurate and timely, no decision should be made or action taken on the basis of this information without first consulting a PricewaterhouseCoopers professional. Should you have any questions concerning the information provided herein or require specific advice, please contact your PricewaterhouseCoopers advisor, or:
David W. Steele PricewaterhouseCoopers 145 King Street West Toronto, Ontario M5H 1V8 Canada Fax: 1-416-941-8415 E-mail: Click Contact Link
Click Contact Link
PricewaterhouseCoopers is a Canadian member firm of PricewaterhouseCoopers International Limited, an English company limited by guarantee.
