CRA beefs up foreign property disclosure requirements

Foreign property owners will need to cough up more info to the tax man thanks to the 2013 Budget.

It called for revisions to Form T1135, which in its present form only requires taxpayers to disclose where the property’s located and the income it generates.

“It seems they now want to know the name of the foreign financial institution where taxpayers are keeping the income,” explains Terry Ritchie, a Calgary-based cross-border financial planner.

Read: A late T1135 can be costly

Ritchie adds the move appears to harmonize with foreign property reporting in the U.S.

The budget document does not specify whether the taxpayer will have to include account numbers.

Read: Why to report foreign investments

“The form is not out yet, so we don’t know for sure,” Ritchie notes, adding the Foreign Bank and Financial Accounts (FBAR) form in the U.S. does require this information.

Kim G. C. Moody, of Calgary-based Moody’s LLP, says the FBAR system was “the first thing that came to mind” when he read the budget proposals, though he also notes the finer points of the new T1135 are not yet clear.

Read: IRS issues guidelines for tax compliance

CRA buys some time

The budget also extends the CRA’s reassessment window beyond three years on concerns that filing the T1135 late would eat into the agency’s ability to conduct a thorough evaluation.

The new rules extend the reassessment by three years if:

• A taxpayer fails to report income from a specified foreign property on his or her annual tax return; and
• Form T1135 was not filed on time by the taxpayer, or a specified foreign property was not identified, or was improperly identified on the form.

The changes will kick in for the 2013 tax year.

Moody says the extension makes sense.

“The existing rules would likely allow CRA to extend the normal three-year period in cases of neglect, carelessness, willful default or fraud. But in borderline cases it wouldn’t be so easy. The new rules give them the wider window they need.”

Read: What the cliff act means for estate taxes

Ritchie notes if your client owns a rental property in Arizona that’s valued over $100,000, she needs to file a T1135, and adds, “the CRA is serious about imposing the penalty for failure to file, which can reach $2,500.”

If the taxpayer fails to file, her penalty depends on a number of factors.

“The first question is whether she reported the foreign income on Schedule 4 of her annual tax return. If not, she has a major problem. She’ll face penalties, additional tax, or worse if the CRA sees it as a deliberate attempt to evade disclosure of income from the foreign asset.”

Read: Don’t forget obscure U.S. tax deadlines

A less-worrisome scenario would be when the taxpayer, while failing to file the T1135, reports the income on her annual return.

In this case it’s clear she didn’t mean to hide it, but she’ll still face consequences for not filing the T1135.

“Many people include the income on the T1 but don’t realize they have to meet the T1135 requirement—even though the T1 is quite explicit about it,” Ritchie says.

In a conspicuous box at the top of page two, it says: “Please answer the following question: Did you own or hold foreign property at any time in 2012 with a total cost of more than CAN$100,000? If yes, complete Form T1135 and attach it to your return.”

Read: No sympathy on T1135

Ritchie emphasizes that even if clients don’t make money from their foreign rental property, they should still report it.

“Better safe than sorry. If the foreign income is $0, put $0 on the form,” he says.

Whistleblowers cash in

The budget also introduces the Stop International Tax Evasion Program, which pays people who tell CRA about “major international tax non-compliance.”

Rewards will be up to 15% of federal taxes collected, provided they exceed $100,000. The payouts are taxable, and will not be given to “individuals who have been convicted of the tax evasion about which they have information,” the budget document explains.

Read: SEC whistleblower awarded $50,000

Moody says this is an attempt to catch up with other countries that already have whistleblower programs in place.

He adds he’s not surprised by the new measure, but suggests “it’s disappointing and disheartening when the government has to pay people to catch the minority of the population cheating on taxes.”