Foreign property disclosure – in good form?

Canada’s foreign property disclosure rules aim to prevent tax evasion by ensuring taxpayers report to Canada Revenue Agency (CRA) all their foreign investment property with a cost over $100,000, either individually or collectively.

Canada’s foreign property disclosure rules aim to prevent tax evasion by ensuring taxpayers report to Canada Revenue Agency (CRA) all their foreign investment property with a cost over $100,000, either individually or collectively. But critics of the new version of CRA’s Form T1135, Foreign Income Verification Statement, say the form is unlikely to help CRA actually detect non-compliance and could impose an unneeded burden on taxpayers who may be required to file it.

For most Canadians, T1135 filing obligations arise due to foreign securities held in their Canadian brokerage accounts (for example, shares of NYSE or NASDAQ companies).  While CRA makes an exception for investments that produced income reported on a T3 and T5 income reporting slip for the year, this concession is restricted in many cases. Further, significant time and effort is needed to identify which foreign investments meet the T3/T5 reporting exception and which ones should be reported. While this exception may reduce the amount of disclosure, filing of the form is still required.

It seems unlikely that tax evaders would file this form to disclose their illicit offshore investments. At the same time, taxpayers who make diligent efforts to comply with their tax and reporting obligations may still make errors in meeting the filing requirement, and suffer penalties even when they have duly reported their income and paid the related tax. In addition to a penalty, failure to properly complete the form could lead to the normal assessment period being extended.

By requiring disclosure of foreign securities held in Canadian accounts and subject to Canadian reporting requirements, the volume of filings is greatly increased for investments with low risk of non-compliance. This sheer volume could potentially make it more difficult for CRA to spot disclosures of investments that may have a greater risk of non-compliance.

Tax evasion is harmful to the economy, and CRA’s efforts to prevent it should be welcome. However, CRA should take care to avoid any measure that could add undue complexity and increase the difficulty and cost for honest taxpayers who make every effort to comply with Canada’s complex tax system. 

Join in the conversation

What steps could CRA take to improve the process for disclosing income from foreign investments? Do you have other ideas that could help CRA improve its ability to detect tax evasion without unduly burdening compliant taxpayers?

Post a comment below, or email Gabe Hayos.

Conversations about Tax is designed to create an exchange of ideas on tax policy and practice developments and issues and their impact on Canadian accountants who practice tax. Comments received can provide helpful input to the public interest advocacy positions developed by the Chartered Professional Accountants of Canada.

About the Author

Gabe Hayos, FCPA, FCA, ICD.D

Vice-president, Taxation, CPA Canada

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