Recently there has been a concentrated effort by the tax authorities to educate taxpayers of these obligations. One area that is easily overlooked, relates to foreign operations and assets held in foreign countries. When you have foreign business operations and/or own property in foreign countries there are additional reporting that is required. The three main types of reporting that may be required are:
Form T1135 – Foreign Income Verification Statement
This form is required if at any time in the taxation year, the taxpayer (be it an individual, company, partnership or trust) owns property located in a foreign country where the cost of that property exceeded $100,000. Property would include shares of non-resident corporations (e.g. shares of Apple, GM, Citibank, etc. even if held through a Canadian brokerage firm), rental property, cash, loans receivable from a non-resident (including any government or corporate bonds).
Property that is considered personal use property is not required to be reported. So your winter home in Mexico or Palm Springs doesn’t count…unless you also rent it out.
This form is required to be filed with the taxpayer’s income tax return for the year. Once this form is more than 100 days late, there is a minimum penalty of $2,500.
Form T1134 – Information Return Relating to Controlled and Not-Controlled Foreign Affiliates
This form is required if the taxpayer (be it an individual, company, partnership or trust) and all other taxpayers that are related to the taxpayer together own more than 10% of the shares of a non-resident corporation. In addition to reporting the ownership, you are also required to provide financial statements of the non-resident corporation. Unlike the requirements under Form T1135, you are required to file Form T1134 even if the assets held in the non-resident corporation are personal use assets.
The new form T1134 instructions:
- Significantly restrict the exemption to file Form T1134 so that even if the criteria of the definition of “dormant” or “inactive” are met (i.e., gross receipts are less than $25,000 and fair market value is less than $1 million), taxpayers must still file Form T1134 if the cost amount for the foreign affiliate is $100,000 of more (similar to the $100,000 threshold found on Form T1135, “Foreign Income Verification Statement”). The CRA has confirmed that “cost” refers to the initial historical cost amount.
- Modifies the gross receipts to include any receipt received in the year, including non-revenue receipts such as loans. This definition is more consistent with the concept of “reportable transactions” for purposes of Form T106. However, Form T106 reportable transactions excludes intercompany current accounts and only includes “loans, advances, and similar amounts”. It is unclear whether this definition is broad enough to include intercompany current accounts.
This form is required to be filed within 15 months of the taxpayer’s year end. Once this form is more than 100 days late, there is a minimum penalty of $2,500.
Form T106 – Information Return of Non-Arm’s Length Transactions with Non-Residents
This form is required when a taxpayer has transactions with a non-resident who they do not deal arm’s length with and the total of those transactions exceed $1 million for the year. While there is a minimum threshold that must be met, and it is quite high, it is important to consider that a “transaction” includes all types of transactions. For example, if a Canadian company loaned $600,000 to its US subsidiary and the US subsidiary repaid $450,000 of it during the year, the total of the “transactions” in this case is $1,050,000 and therefore the Canadian company is required to file Form T106.
This form is required to be filed with the taxpayer’s income tax return for the year. Once this form is more than 100 days late, there is a minimum penalty of $2,500.
It is important to note that if it is found that the failure to file any of the above forms was due to gross negligence, the penalty greatly increases and can easily be in excess of $20,000 per year.
The obvious question that usually arises once someone determines that they haven’t been filing these forms is, is there any way avoid these substantial penalties and still come clean? Of course the answer is yes. There is a program available for taxpayers to come forward and become compliant in their tax filings without the threat of these penalties applying. This program is called the Voluntary Disclosure Program (“VDP”) and there are very specific conditions that all must be met in order to be accepted under the VDP.
Firstly, the disclosure must be voluntary. Generally that means that the taxpayer isn’t currently in the midst of an audit by the tax authorities or advised that an audit is about to commence.
Secondly, the disclosure must be complete. This basically means that everything must be disclosed so if there is any unreported income to go along with any foreign property held, that also must be disclosed and the appropriate income tax paid on those earnings. If there are taxes owing, interest will also be payable. It has been my experience that the Canada Revenue Agency will normally reduce the interest rate charged under the VDP; although there is no statutory obligation for the Canada Revenue Agency to do so.
Thirdly, the disclosure must involve a penalty or the potential application of a penalty. In the case of failure to file any of the above foreign information returns there is clearly a penalty. However, this condition could be met if the taxpayer simply hadn’t filed their returns and there is a late filing penalty.
Lastly, the disclosure must include information that is at least one year past due. This doesn’t mean that everything being disclosed must be at least one year past due. As long as any portion of the disclosure meets this test, all the disclosures being made is accepted. This allows the taxpayer to include the most recent filings along with older filings and become compliant as quickly as possible.
While these four conditions may seem to be straight forward, it is important to ensure that the process is handled properly so that you are not denied entry into the VDP and you are not simply providing the tax authorities a nice laid out trial to audit you.
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