ISSUES WITH RESPECT TO T1135 FOR THE 2013 REPORTING YEAR

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1 ISSUES WITH RESPECT TO T1135 FOR THE 2013 REPORTING YEAR November 29, 2013 IIAC Member staff are being approached by tax professionals seeking help in completing T1135s Foreign Income Verification Statement for clients. While not a requirement for Member firms to report, the significantly more detailed information required by the new forms will almost certainly demand that clients seek extensive help from Member firms to complete the form or risk increased penalties. We have engaged with the CRA and are trying to propose a workable middle ground. Below is information we provided to the CRA and attached are copies of the old and new fiorm. 1. We strongly support and appreciate the government s and Canada Revenue Agency s (CRA s) efforts to stop tax evasion and ensure that Canadians and Canadian businesses pay their fair share of tax. We agree with the purpose and objective of the amended Foreign Income Verification Statement (Form T1135) and appreciate the 1998 Auditor General Report reference you provided. 2. We understand that neither the tax legislation nor the criteria for those who must file a Form T1135 have changed. It is the specific nature of the additional information to be reported that will present challenges for our dealers clients (taxpayers). 3. We know that there is no requirement for our member dealers to report or to help taxpayers in this reporting and therefore are not sure that a request for administrative relief is what we think is needed by our members. Our comments below are focussed on elaborating how it will be almost impossible, practically speaking, for our members clients (taxpayers) or the tax professionals some may employ to provide this information on their own and the taxpayers may need relief. 4. We respectfully suggest that this is a matter of some immediate urgency based on the requests and questions our members are receiving already from tax professionals and some clients. The information is not readily available and would require considerable manual work or some systems automation that is not straightforward. In the case of the dealers, this would take place at the same time as, and draw on some of the same resources who are working on, the T5013 combination and XML-ization project, adding further to resource challenges and risks. 5. This document addresses our current year concerns only with the ability of our member dealers clients (taxpayers) to comply. We can elaborate more fully on them in a meeting at your convenience after you have had a chance to review our concerns. What has changed between the old and new T1135 Even taxpayers who were completing, or whose tax professionals were tracking, an exhaustive listing of securities before completing the T1135 will not have some of the information they need for the reasons noted below. The table also identifies problems that our members will face should there be a need to provide additional information to their clients. Change in Amended T1135 Comment CONSIDERABLE Challenges for Clients (taxpayers) New T1135: Requires reporting of the amount of the highest cost for each foreign property Client of a dealer (taxpayer): Usually will not have access to the value of each security on a daily basis;

2 Change in Amended T1135 Comment held at any time in the year (the old T1135 this is particularly the case for clients with: (i) required selection of a range of costs (e.g., managed (discretionary) accounts and (ii) baskets more than $1 million, more than $700,000, (different from a fund as the taxpayer owns the etc.) to be reported underlying securities) offered by a good number of dealers, where the taxpayer invests a specific amount and directly holds a very large number of securities the biggest issue will be where clients hold sometimes identical assets at different brokers and will effectively have to obtain the value at each/all dealers for 250 days a year, compare values for each security per day held in more than one location and report the resulting highest amount * Dealer: Not maintained by dealers on a daily basis by client due to huge data storage requirements (multiply number of clients by number of securities held by 250 days for a single year); no call for this information by client or dealer; automation of the process to calculate the highest value in the year per security per client demands time * New T1135: Requires reporting of any net Taxpayer: Likely impossible due to current income generated from a foreign property on a reporting practices and would require considerable security-by-security basis (the old T1135 work as the majority of dealer T5 slip and XML required reporting of the total income reporting is in aggregate form by client and not on a (including taxable capital gains) reported from security-by-security basis. the foreign property (see next item below)) Dealer: Almost impossible to be done accurately as income adjustments are being made by issuers as late as March 7, 2014; even assuming accurate timely filing, 25% of limited partnership units alone are refiled SOME challenges for clients (taxpayers) New T1135: Requires the specific country Taxpayer: May not be able to be identified by (country code) to which the foreign property taxpayer independently in many cases without relates on a security-by-security basis (the old extensive searches; need clarity on how to treat (i) T1135 required the geographic region where securities of supranational organizations (EIB, EBRD, the foreign property is located) World Bank); (ii) dual-listed securities (a security that could be bought on both NYSE and the TSX, with some portion disposed of on either one, so a client would not know whether this affects the threshold); (iii) securities whose ownership changes hands but the securities are fungible (e.g., Tim Hortons was originally Canadian, then U.S. when bought by Wendy s, and then was sold back into Canadian hands a year later it is unlikely a typical taxpayer/client would know this as the place of incorporation/country code is not displayed on monthly statements; (iv) securities of Dutch Royal

3 Change in Amended T1135 New T1135: If no election is made, all amounts must be converted using rates in effect at the time of the transaction for the asset purchases and income received (an average rate for the year can be used) New T1135: Requires reporting of any capital gain or loss on disposition generated from the foreign property on a security-by-security basis for each foreign property held at any time in the year (the old T1135 required the total income (including taxable capital gains) reported from the foreign property) New T1135: Cost of the property at the end of the year on a security-by- security basis New T1135: Name of specific foreign institution, investment or entity holding funds outside Canada Comment Shell, where A shares are listed on the London and Netherland stock exchange, B shares are only available in London or via an ADR listed in NYC, with income that may be paid in British pounds or U.S. dollars, for later conversion into Canadian dollars for the client account Dealer: Can be done with some difficulty, but will need clarity regarding multi-listed, supranational organizations, and certain particular products Taxpayer: See below Dealer: Not maintained by dealers on a daily basis by client due to huge storage requirements; standard practice is for foreign income to be converted to Canadian dollars using the year s average noon Bank of Canada rate for year-end reporting, which may be slightly different from the rate posted the day of income receipt, which in turn can differ from the date of the transaction NO NEW challenges for clients (taxpayers) Taxpayer: Currently receives disposition amount from dealer Dealer: Dispositions of securities are reported to the CRA on T5008s No known issue (beyond the challenges of hard-tovalue securities) No known issue * Determination of maximum cost is extremely challenging for investors and/or their tax professionals as it is not discernable on a security-by security-basis because: This is not reflected on monthly account statements There are no pre-existing ad hoc report queries calculating highest value in a year per security per taxpayer. Even if small financial institutions with limited clients holding a limited number of securities could provide these to investors (although this has not been fully tested), firms with millions of clients and over a hundred thousand securities would require in the short-term extensive manual workarounds. Even developing some automation would require a number of weeks for development, bringing the testing phase to at least the middle of January and proper systems changes would go considerably later. We have been unable to estimate the number of requests we will have for assistance but can expect, based on what we have seen to date, that requests will come from both those who should complete the T1135 form and those that are not sure, adding to work for dealers. Queries will come from those who have large portfolios, and also from those that have small

4 accounts but a small cottage just over the border. Also under any scenario, we expect that the number of people reporting on a T1135 will increase substantially, less due to efforts to avoid taxes, than for the following reasons: i. We believe that a good many Canadians who receive foreign income may honestly have not made the connection that they need to fill out a foreign income statement (T1135) because: they buy securities in Canada; receive payment in Canadian dollars; even so-called foreign securities can be dual-listed, and they receive Canadian tax slips for any income. ii. There has been an increasing focus on tax evasion in the press, and publicity surrounding the new T1135s, so there is a natural increase in awareness. iii. Those who had been estimating, now doing actual calculations, may find (with no change in property value) that they should have been reporting these are those close to the threshold and not, we believe, the main targets of the amended form. iv. We believe that penalties will effectively increase given the significant increase in the information requested to be filed and greater specificity of some of the calculations. Also, understand that the CRA has extended the reassessment window if the taxpayer fails to file T1135 or fails to provide correct information, which combined may lead to greater efforts at accuracy. Why we believe that there may be little risk of revenue loss with respect to the 2013 year In his 1995 Budget, the Minister of Finance announced that Canadian individuals and corporations that hold or acquire investments outside Canada would be required to disclose additional information on their interest in such investments. We agree with this goal and the stated reason for this, that is, because the CRA cannot compel offshore third parties to provide information to verify taxpayers' selfassessments. The CRA can, however, compel Canadian dealers to provide information, and the Auditor General s report references the ability to access Canada domestic third-party databases. Also, the taxpayers are holding and have acquired the securities they hold inside Canada, a situation with results very different from taxpayers that buy and hold foreign financial assets outside Canada, which provides the CRA with additional control that all income is reported, as highlighted below: Foreign assets held by Canadian residents in a financial institution In Canada, this is being Foreign income distributions (including Reported to the CRA via? stock dividends and spin-offs) are XML T5 files Is there an instrument or income type that is not reflected annually? i. Non-fund securities (for example, does this include tracking properties, such as Not known; at best a? warrants (under ITA ss )? short timing difference ii. Other None known? When assets are disposed of Reported to the CRA on? T5008s Outside Canada We hope this is helpful and will follow up as soon as possible. Have a good weekend!

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