In its 2013 budget, Canada announced the launch of Stop International Tax Evasion Program aimed at reducing international tax evasion and avoidance. The program allows Canada Revenue Agency to pay rewards to individuals with information on significant international tax non-compliance that leads to the collection of outstanding taxes due. Canada Revenue Agency also announced details to increase compliance and audit efforts on international tax evasion and aggressive tax avoidance.
One tool that Canada Revenue Agency has used to gather information about income and assets outside Canada is Form T1135 – Foreign Income Verification Statements. For years, taxpayers have had to report certain assets they own outside Canada where the total cost basis of all assets exceeds $100,000. While there are exceptions for some non-Canadian assets such as personal-use real estate and certain non-Canadian pension plans, the definition of non-Canadian assets includes non-Canadian real estate generating rental income and non-Canadian securities even if held with a Canadian financial institution.
The penalty for failure to timely file Form T1135 is $25 per day (subject to a minimum penalty of $100) up to a maximum of $2,500 per year. For individual taxpayers, the form is due on or before their normal filing due date. Taxpayers who have not filed this form for a number of years should consider filing the forms under the Voluntary Disclosure Program to minimize or eliminate penalties.
Canada Revenue Agency is redesigning Form T1135 for future years to request more information including the name of the specific non-Canadian institution or entity holding funds outside Canada, the specific country to which the property relates and the income generated from that country. The expanded information request reminds us of the IRS’ expanded disclosure requirements for IRS Form 8938 that came into effect in 2011.
The recent Canadian federal budget also proposed to extend the reassessment period where taxpayers have reporting deficiencies on non-Canadian income. Where a taxpayer does not include income from their non-Canadian account on their tax return and does not timely file Form T1135, the reassessment period increases to six years. Normally, the reassessment period is three years.
The agency is also trying to make it easier for taxpayer to file this form. Currently, taxpayers who electronically file their individual income tax returns must print, sign and mail Form T1135 separately. The agency is working on allowing taxpayers to include the form with their electronically filed tax return.
More information on Canada Revenue Agency’s changes to Form T1135 can be found here: http://www.cra-arc.gc.ca/gncy/bdgt/2013/txvsn3-eng.html. Taxpayers need to be prepared to spend more time reviewing their assets and investments and carefully review the need to file Form T1135. In this new era of foreign information collection by governments around the world, we believe that the information reporting will become more onerous.
Written by Steven Flynn, CA/CPA