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tax matters

No matter what age I am, I look forward to continually learning. I'm reminded of the snowbirds who were travelling in Florida and were receiving a lesson in geography along the way. The man and his wife were on the way to their Florida home for the winter and were driving through the town of Kissimmee, Fla. They were trying to figure out how to pronounce the town's name, and couldn't agree on it: KISS-a-me, Kiss-A-me, Kiss-a-ME? Since they were hungry, they decided to stop for a bite to eat in town. While they were at the counter, the woman asked the young lad taking their order: "Excuse me, my husband and I can't agree on how to pronounce the name of this place. Can you tell me where we are, and say it slowly?" The lad looked at her and said "Buurrgger Kiinngg."

Geography isn't the only subject snowbirds have the opportunity to learn about. Taxes are another subject. Today, I want to share the stories of some snowbirds who learned something about Canada's foreign reporting requirements recently.

The requirements

Not since 1917, when the first income-tax forms had to be filed by Canadians, has there been so much ruckus around the filing of a tax form. Yet, Form T1135, which has been revised recently, has created just such a stir. Form T1135, Foreign Income Verification Statement, is a form that you must file if you're a Canadian resident and the total cost of your foreign investments, including stocks, bonds, real estate and many other assets is more than $100,000 at any time in the year. Filing Form T1135 has become much more onerous over the past year since the taxman announced that he'd like to collect more detailed information than ever before about the foreign investments you might hold.

The types of foreign assets that will trigger a requirement to file Form T1135 is broad. These assets are called specified foreign property, and the instructions for Form T1135 (found at do a good job of explaining what specified foreign property includes. Most notably, the assets that escape a requirement to report on the form include Canadian mutual funds (even if the funds invest in foreign securities), property used in an active business, and personal-use property (such as a vacation property). As an aside, the form is due on the same date as your personal tax return, and there are nasty penalties for filing Form T1135 late, so you'll want to avoid this. As of Feb. 9, 2015, you'll be able to file Form T1135 electronically for the 2014 tax year.

The stories

George and Ruth have been spending part of their winters in their Florida condominium for years. They had paid $90,000 for the place a number of years ago, and rent the condo to others for most of the year. They also own shares of Scotiabank, which cost them $20,000, which they hold in a U.S. brokerage account with an investment dealer in Florida.

George and Ruth didn't think that they were required to file Form T1135 because their condo is used for their personal vacations (personal-use properties escape the reporting requirement), and their shares in Scotiabank are shares in a Canadian, not a foreign, corporation. They were mistaken.

Their Florida condo is primarily a rental property – not a personal-use property – since it's used most of time for renting to others. As for the Scotiabank shares, they're held in a foreign (U.S.) brokerage account, and so they are required to report the shares even though Scotiabank is a Canadian corporation.

Since the total cost of their "foreign assets" is more than $100,000, they must report both the condo and Scotiabank shares on Form T1135.

Now, consider Joan's story. Joan and her husband have owned an Arizona home for many years. The cost of the property was $95,000. Today, it's worth $275,000.

Joan's husband passed away last year, and Joan doesn't have a desire to spend as much time in Arizona now, so she has begun renting the property for most of the year.

Joan didn't think she'd have to report the property on Form T1135 because her cost is less than $100,000. Not so. When converting a property to an income-producing property, there are rules in Canadian tax law which deem Joan to have sold and reacquired the property at its fair market value on the date of the change in use.

So, Joan's cost amount for tax purposes is now the $275,000 current value. Since her cost is now over $100,000, she'll have to file Form T1135.

Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.