T1135: 13 questions and answers

The T1135 form has been updated several times over the last few years. As of the 2014 taxation year, the T1135 has a new streamlined reporting option for specified foreign property held in accounts with Canadian registered securities dealers and/or Canadian trust companies.

Read: Understanding the new T1135

Here are some common questions and answers about the T1135.

1. Is the $100,000 threshold based on the fair market value of the property?

No, it is based on the cost amount. The cost amount is generally the adjusted cost base of the asset and not the fair market value, in Canadian currency.

2. If in 2013 I held shares in a foreign corporation with a cost amount of $55,000, and I also had a bank account in the U.S. with $50,000 on deposit, am I exempt from filing Form T1135 since neither asset has a cost amount greater than $100,000?

No. You must file Form T1135 if the total cost amount of all SFP exceeds the $100,000. In this case, the total cost amount is $105,000, which exceeds the threshold.

3. What happens if I held specified foreign property during the year with a cost of more than $100,000, but held less than $100,000 at the end of the year?

As long as you met the required threshold of $100,000 at any time in the year, you must report all SFP held during the year, even if you sold any or all of it before year-end.

4. Are shares of foreign corporations held through a Canadian broker still considered “specified foreign property?”

Yes. Shares of non-resident corporations are specified foreign property and should be reported, regardless of whether the shares are held through a broker.

Read: Enhanced T1135 means more work for advisors

5. If I have an investment in a U.S.-based ETF that holds investments in several corporations that are resident in Europe, what country code should I use?

Your investment is considered an interest in a U.S. mutual fund trust, and not in the underlying investments of the trust. Report the country code of the residence of the trust — in this case, the USA.

6. If I hold shares of a corporation based in the United States, but in a United Kingdom brokerage account, should the country code of the shares be USA or GBR?

For the purposes of Form T1135, the country code for shares of a non-resident corporation is the country of residence of the corporation. Therefore, code these shares as USA.

7. Does the T1135 mean a person does not have to report income from foreign property where the cost amount of that property is below $100,000?

Canadian resident taxpayers must report all income they earn from foreign property, regardless of the cost amount of the foreign property. The $100,000 threshold means that many Canadians do not need to comply with the additional reporting requirements of Form T1135, but this does not exempt them from paying tax on any income earned on such property.

Read: 6 tax filing tips for 2015

8. Do I report the gross or the net income?

You must report gross income from the specified foreign property on Form T1135.

9. Am I reporting the capital gain (capital loss) or the taxable capital gain (allowable capital loss) on the disposition of a specified foreign property?

The “gain (loss) on disposition” is the capital gain (capital loss), and not the taxable capital gain (allowable capital loss).

10. Can capital losses from the disposition of Canadian property be netted against capital gains realized on the disposition of specified foreign property?

No. The income (loss) and the gain (loss) on the disposition of each particular SFP have to be reported separately on Form T1135. You cannot offset Canadian capital losses against foreign capital gains on Form T1135. The purpose of Form T1135 is to identify foreign property, not to calculate taxable income.

11. If I own a condo in Arizona that has a cost amount of $120,000, is the property considered SFP for the purposes of Form T1135 if the condominium is:

• Rented out for eight months of the year with a reasonable expectation of profit and kept for personal use the other four months?
• Rented out for part of the year without a reasonable expectation of profit for the purpose of recovering a portion of the condo expenses?

Specified foreign property does not include personal-use property. Personal-use property is generally defined as property owned by the taxpayer that he or she or a related party uses primarily for personal and enjoyment purposes. The CRA takes the view that “primarily” means more than 50%. Whether a particular property is primarily for personal use and enjoyment is determined on a case-by-case basis.

In situation 1, the property is not held primarily for personal use and enjoyment. As a result, it is a SFP and has to be reported on Form T1135.

In situation 2, if there is no reasonable expectation of profit and the person is merely recovering part of the condo expenses, the CRA will consider it a personal-use property. As such, the property is not a SFP and is excluded from the reporting requirements of Form T1135.

Read: How to own U.S. rental property

12. If a taxpayer acquires a SFP for $500,000 with a down payment of $50,000, and finances the balance through a mortgage, does the taxpayer have to file Form T1135 if the property is his or her only foreign property?

Yes, the taxpayer still has to file Form T1135. Although the down payment is $50,000, the cost amount of the property is $500,000 and therefore exceeds the $100,000 reporting threshold.

13. There are two versions of form T1135 available on the CRA website. Which version can I use?

The CRA encourages taxpayers to use the 2014 version of form T1135 for all tax years. However, the 2014 version of the form must be used for 2014 and later tax years if filed after July 31, 2014. The CRA will accept the 2013 version of the form (and the use of the related reporting methods and exceptions) for the 2013 tax year, and for the 2014 tax year if it was filed prior to July 31, 2014.

Francois Bernier is Mackenzie Investments’ Director, Tax & Estate Planning. He can be reached at: fbernier@mackenzieinvestments.com.