Beware of These T1135 Traps

There are solutions to minimize the T1135 reporting. Contact GTA Wealth Management Inc. to reduce your tax bill and increase your returns.

It is required that clients with over $100,000 in foreign property file a T1135 form. It is crucial for accountants to acquire relevant and complete information due to the complexity level of this form. The $100,000 threshold was planned to be increased; however, the Liberal government may not change this limit.

Foreign Insurance

In a case where a client may have moved from a location outside of Canada for work or other reasons, there is a possibility that he or she may hold foreign-issued life insurance. This policy must be reported in box 6 of the T1135 titled “Other Property outside Canada.” The form specifically asks for the “cost amount” which is not a recognized term when dealing with insurance policy valuations. CRA addresses this issue, stating that the adjusted cost based of an interest in a policy may be used as the cost amount to be entered on form T1135. While finding the ACB of a Canadian-issued policy is usually completed by asking the policy broker, finding the ACB for foreign-issues policies can be a little more challenging. The reason for the complexity of the ACB is due to the calculation. Foreign countries have their own cost basis which does not line up with the Canadian cost basis. The ACB is the amount by which premiums paid by the policyholder exceed the Net Cost of Pure Insurance (NCPI). NCPI is a Canadian concept, which is where the problem appears.

In order to the resolve this issue, you can ask the issuer of the policy. If they have significant amount of Canadian customers, chances are they will have a solution that lines up with the Canadian cost basis. Since there are penalties for filing the T1135 late ($25 per day, up to $2500), is it important that the client preforms these tasks early.  The due date for the T1135 is June 30.

Box 2: of form T1135 deals with the reporting of shares in non-resident corporations, other than foreign affiliates. There are two forms of residency when it comes to corporations; factual and deemed. If any given individual owns a corporation outside of Canada it is essentially factually a non-resident and therefore, included on form T1135. However, if that same individual is a resident of Canada, and the “mind and management” of the corporation is in Canada; then the corporation in which he or she owns may be deemed a resident of Canada and therefore, would be excluded from T1135.

Box 3: Indebtedness owned by non-resident may also provide complications for clients. If you’ve loaned money to a relative or a corporation outside of Canada even though you are not receiving any interest, it is still a foreign sourced receivable which should be reported. If you are receiving distributions from a non-resident trust, box 4 must be filled out. In order to fill in this box, the individual must be aware of which type of beneficiary they are; either capital-only, income-only or both.

Box 5: Real property outside Canada (other than personal use and real estate used in an active business) must be reported. The active business section of this definition is usually the part that throws people off, for example, someone who rents out multiple units may consider that an “active business” and therefore, not include it on the form when in fact, they should.  Get professional help.  We have seen many clients add to the T1135 personal property held abroad that is not being rented.

ADRs and ETFs

American Depository Receipts (ADRs) facilitate trading shares that are listed on non-U.S. or Canadian Markets, such as Europe. The ADRs will be listed on the NYSE, but the shares within the corporations will not. These investments must be recorded on the T1135. The shares must be recorded in the country in which the corporation operates. The same rules apply for ETFs, if the ETF holds shares in several different countries, you are required to report on each of those sub holdings individually. CRA says that you must try and get this information, but is usually hard to obtain. If this is the case, you may report in aggregate by country.

Do you have foreign investments?  Have you filed your T1135? Handling your own tax issues can get complicated. The professional accountants at Tax Doctors Canada have extensive international tax experience and a proven track record of helping reduce your T1135 reporting. We would welcome an opportunity to be of service you you.

Contact or call GTA Wealth Management toll free 1 855 GTA WLTH (855 482 9584) to accelerate your ride to financial independence. A professional wealth management financial advisor is ready to serve your wealth management, tax return and planning needs. GTA Wealth Management Inc. has three convenient locations in Mississauga, Toronto and Markham to serve you.

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