T1135 Foreign Income Verification Statement A Brave New World!

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1 T1135 Foreign Income Verification Statement A Brave New World! October 24, 2013 Dale Franko, CA, CPA (IL, USA), TEP Moodys Gartner Tax Law LLP Bruce Harris, FCA, FCPA, TEP PricewaterhouseCoopers LLP Pamela Cross, LL.B, TEP Borden Ladner Gervais LLP (moderator) STEP (Canada) 1

2 Overview History of the T1135 Why should we care: Implications of failing to properly comply Amending a T1135 Specified Foreign Property held by a Canadian Partnership Highlights of the changes a walk through the proposed form Outstanding technical issues and questions What is an advisor to do when dealing with clients? STEP (Canada) 2

3 History of the T1135 Section added by 1996 Budget effective for fiscal periods that begin after Late filing penalties assessed on post 2005 filing obligations. Federal Budget, Supplementary Information, March 21, 2013: Revised Form T1135 o The revised form will require taxpayers to provide more detailed information regarding each specified foreign property, including: The name of the specific foreign institution or other entity holding funds outside of Canada; The specific country to which the property relates; and The foreign income generated from the property. o The revised form will be required to be used for the 2013 and subsequent taxation years. The revised T1135 was released on June 25, 2013 and the revised return is required to be filed for taxation years ending after June 30, STEP (Canada) 3

4 Implications of Failing to Properly Comply Why should we care? Proposed Additions 152(4)(b.1), (b.2) and Proposed Amendment 152(4.01) Proposed paragraph 152(4)(b.2) extends the normal reassessment period by three years for all purposes if both of the following conditions have been satisfied: (i) (ii) The taxpayer, or a partnership of which the taxpayer is a member, has failed to file for the year a prescribed form as and when required under subsection 233.3(3) or to report on the prescribed form the information required in respect of a specified foreign property (as defined in subsection 233.3(1)) held by the taxpayer at any time during the year, and The taxpayer has failed to report, in the return of income for the year, an amount in respect of a specified foreign property that is required to be included in computing the taxpayer s income for the year. STEP (Canada) 4

5 Implications of Failing to Properly Comply Why should we care? Proposed amendment to subsection 152(4.01) only applies to paragraphs (4)(a), (b), (b.1), or (c) and does not apply to paragraph (b.2). This is punitive as the proposed amendment would allow an assessment, reassessment, or additional assessment to otherwise statute barred taxation years on all taxation matters that have nothing to do with foreign income because of the application of proposed paragraph 152(4)(b.2). The CRA has acknowledged that the extended reassessment period applies to all aspects of the tax return, however, the CRA has yet to comment on how they will administer the proposed legislation. STEP (Canada) 5

6 Specified Foreign Property held by a Canadian Partnership Proposed paragraph 152(4)(b.2) applies where a Canadian resident individual holds all specified foreign property through a Canadian partnership: Previously, the proposed wording in 152(4)(b.2) read in respect of the year and the taxpayer (i) has failed to file for the year... ; Currently, the proposed wording in 152(4)(b.2) reads in respect of the year and if (i) the taxpayer, or a partnership of which the taxpayer is a member, has failed to file for the year. STEP (Canada) 6

7 Amending a T1135 Given proposed paragraph 152(4)(b.2), query whether it makes sense for a taxpayer to amend T1135, as presumably, the amendment could attract the application of 152(4)(b.2)(i) where the taxpayer, or a partnership of which the taxpayer is a member, has failed to report on the prescribed form the information required in respect of a specified foreign property held by the taxpayer at any time during the year. STEP (Canada) 7

8 Highlights of the changes STEP (Canada) 8

9 Highlights of the changes STEP (Canada) 9

10 Highlights of the changes STEP (Canada) 10

11 Highlights of the changes STEP (Canada) 11

12 Highlights of the changes STEP (Canada) 12

13 2013 STEP Conference Questions 1. A Canadian resident trust (A) is the beneficiary of a second Canadian resident trust (B) which holds title to US vacation property. Does trust B need to report the US vacation property on a T1135? CRA said no, since the property is for personal use. However, the personal use is by beneficiaries of trust A, not trust B (since trust A is the beneficiary of trust B not the individuals who use the property). What is the correct answer? STEP (Canada) 13

14 2013 STEP Conference Questions 2. Are foreign assets (US stocks) in a Canadian RRSP account (or RESP or RDSP) foreign and must be reported? STEP (Canada) 14

15 2013 STEP Conference Questions 3. If the only foreign assets held offshore are non Canadian pension assets that are lockedin, does the taxpayer need to file form T1135? STEP (Canada) 15

16 2013 STEP Conference Questions 4. Do Canadian stocks in a foreign brokerage account require a T1135 to be filed? What about Canadian cash in a foreign brokerage account? STEP (Canada) 16

17 2013 STEP Conference Questions 5. How are American Depositary Receipts ( ADR s) to be reported on T1135? For example, Nestle resident of Switzerland traded on the NY Exchange. STEP (Canada) 17

18 2013 STEP Conference Questions 6. Is a Canadian Pubco (i.e. TD Bank) which trades on both Canadian and US markets reportable on T1135? STEP (Canada) 18

19 2013 STEP Conference Questions 7. Do US assets (i.e. shares like Apple or Wal Mart) need to be reported if they are held in a TFSA or RSP? STEP (Canada) 19

20 2013 STEP Conference Questions 8. Why bother requiring US investments in Canadian brokerage accounts when T5 s are required to be issued? It simply increases compliance costs with no added benefit for CRA? STEP (Canada) 20

21 2013 STEP Conference Questions 9. Mutual funds which ones should be reported? For example, Canadian mutual funds that invest in foreign companies/bonds or just foreign mutual funds? STEP (Canada) 21

22 2013 STEP Conference Questions 10. What would be reported for real estate holdings in a time share? 2 questions i.e. for Marriott, one can hold weeks with a home resort. If the home resort is in the USA would it be US personal use property? One can also own points in a Marriott time share. The points can be used at any Marriott resort worldwide. What country would the real estate asset be attributed to? STEP (Canada) 22

23 2013 STEP Conference Questions 11. Will an ADR for a Spanish company traded on the NYSE be considered as a European asset or a US asset? STEP (Canada) 23

24 2013 STEP Conference Questions 12. How is foreign income determined gross amount or net of related expenses? STEP (Canada) 24

25 2013 STEP Conference Questions 13. Is the full gain or loss reported, or the taxable capital gain/ allowable capital loss included as the income reported from foreign property on the T1135? STEP (Canada) 25

26 Section 94.1 Matters Proposed legislative amendments will unconditionally extend the normal reassessment period by three years where the assessment, reassessment or additional assessment is made to give effect to sections 94, 94.1 and Section 94.1 Prescribed income inclusions for offshore investment funds. STEP (Canada) 26

27 What s an advisor to do? Advice? Fees? Liability? STEP (Canada) 27

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