Foreign Income Verification Guide: Form T1135 

Introduction:
Canadian taxpayers, including individuals, corporations, partnerships, and trusts, who owned specified foreign property with a total cost of $100,000 (Canadian) or more at any point during the year, are mandated to file Form T1135. Non-compliance can lead to severe penalties, making it crucial to be well-informed about the filing requirements. 

Who Should File Form T1135?
The Canada Revenue Agency (CRA) mandates that all Canadian resident taxpayers who owned specified foreign property costing $100,000 (Canadian) or more at any time during the year file Form T1135. This holds true even if the properties were disposed of before the year’s end. 

What Constitutes Specified Foreign Property?
Specified foreign property includes: 

• Funds in foreign banks or mutual funds. 
• Real estate located outside Canada (excluding those primarily for personal use). 
• Shares in foreign corporations. 
• Canadian corporation stocks held in foreign accounts. 
• Interests in non-resident trusts. 
• Debts owed to you by foreign entities. 
• Foreign-issued life insurance policies. 
• Rights to acquire foreign specified property. 
• Other tangible and intangible assets outside Canada. 

Exclusions:
The following are not considered specified foreign property: 

• Property used in an active business. 
• Personal use property like cars, vacation homes, jewelry, etc. 
• Assets in registered Canadian plans like RRSP, RRIF, TFSA. 
• Interests in certain foreign retirement accounts. 
• Canadian mutual funds with international investments. 

Reporting Methods:
For those with foreign assets costing less than $250,000 throughout the year, a simplified reporting method is available. This method requires only the country of the funds, total income from the assets, and any gain or loss from their sale. However, if the assets cost $250,000 or more at any point during the year, detailed reporting is compulsory. This detailed method requires information on each property, such as its description, country, highest cost during the year, year-end cost, income generated, and any gains or losses. 

Challenges:
Filing Form T1135 can be complex, especially when determining the “adjusted cost base” (ACB) of a property. Factors like partial sales, dividend reinvestments, renovations, and additional investments can complicate the ACB calculation. For immigrants, the cost is equivalent to the property’s market value upon immigration. In cases of inheritance or gifts, the cost is the value on the date of receipt. Additionally, the country of residence of a stock’s corporation is more relevant than the stock exchange it’s traded on. 

Deadlines and Penalties:
Form T1135 must be filed simultaneously with the income tax return. Late filings can result in a penalty of $25 per day, up to a maximum of $2,500. If the CRA deems the failure to file as intentional or grossly negligent, or if it persists beyond 24 months, additional penalties may apply. The CRA can typically assess a return for three years, but this can extend to six years in cases of non-compliance with Form T1135. 

Voluntary Disclosure Program (VDP):
Taxpayers who have missed or incorrectly filed Form T1135 can potentially benefit from the CRA’s Voluntary Disclosure Program. This program offers some penalty concessions for those who voluntarily rectify their reporting. However, once the CRA has flagged or notified an individual, they cannot utilize the VDP.