Don’t forget foreign assets when you file your tax return

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An informal interview of students at Harvard University revealed that the most difficult course you can take at the school is Physics 16: Mechanics and Special Relativity. Students can expect to spend 11 hours outside of class each weekend just to keep up. As one former student suggested: "Physics 16 will sometimes control your life." A full 85 per cent of students who take the course rate it as "difficult" or "very difficult," although 93 per cent of those who make it through would recommend it to others.

Now, you may not be a student at Harvard. But if you're a Canadian taxpayer, you too can experience the same feelings of anxiety, stress and 11 hours of hard work on the weekend by pulling out your tax forms and figuring them out. Form T1135, in particular, is a challenge, and can result in numbness, sweating and headaches. Unlike Physics 16, however, 93 per cent would certainly not recommend it to others – if you can avoid it. Here's a primer on the T1135.

Purpose

Form T1135, the Foreign Income Verification Statement, is intended to share with the Canada Revenue Agency (CRA) information about any assets you have that are considered "specified foreign property." Form T1135 is not a tax return, but simply an information statement which may cause CRA to check out your tax return to ensure you've been reporting income from those foreign assets.

Proviso

Our tax law provides that you must file Form T1135 if you owned certain foreign investments or assets where the total cost of these assets is more than $100,000 at any time in the year. These assets include cash in a bank account outside of Canada, foreign debt including government or corporate bonds, tangible property such as real estate or artwork located outside of Canada, shares in foreign corporations, shares of Canadian corporations held in an account outside of Canada, precious metals, gold certificates, futures contracts and a few other less common assets held outside of Canada.

The good news is that you're not required to report foreign securities held inside Canadian mutual or pooled funds, or investments held inside registered plans such as your registered retirement savings plan (RRSP), registered retirement income fund (RRIF), tax-free savings account (TFSA), registered education savings plan (RESP) or registered disability savings plan (RDSP). You can also exclude personal-use property, such as a vacation home, which is not ordinarily rented out.

The form can be difficult to fill out if the total cost of your foreign property is $250,000 or more, because you'll have to fill out "Part B" of the form, which requires a lot of detail. If your total cost is between $100,000 and $250,000 you can fill out the simplified "Part A."

Form T1135 is due on the same date as your tax return – which is May 1, 2017, for most taxpayers, for the 2016 tax year (since April 30, the usual deadline, falls on a Sunday this year). You'll face a penalty of $25 for every day that you're late in filing Form T1135, to a maximum of $2,500, plus interest.

Problems

There are many situations where you may not think you have to file Form T1135, but you might. Consider Frank, who inherited shares of a U.S. company from his mother last year. His mother paid $50,000 for the shares (and never had to file Form T1135), but the shares were worth $120,000 when Frank inherited them. His cost amount is $120,000, so he'll be required to file Form T1135.

Now, consider Wendy. She sold her Arizona condo in 2016 for $150,000. She originally purchased the condo for $110,000 and rented it out most of the time. She'll have to file Form T1135 because the cost was over $100,000, it wasn't a "personal-use" property and she owned it "at any time in the year."

Finally, consider Jane. She and her late husband purchased a home in Florida many years ago, at a cost of $90,000. The home was for their own use. After her husband's death in 2015, Jane decided not to travel to Florida as much and, in 2016, she started renting it out most of the time. This triggered the "change in use" rules, and Jane was deemed to have sold and reacquired the Florida home at it's current value of $275,000. Jane's cost is now $275,000 for tax purposes, and the property is no longer a personal-use property, so she now must report the property on Form T1135.

If any of these folks fail to file Form T1135, they could face the nasty penalties I talked about earlier.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and founder of WaterStreet Family Offices