T1135 Filings
Pursuant to section 233.3 if, at any time in the year, the total cost amount of all specified foreign property held exceeds $100,000. These reporting obligations are set out in form T1135, “Foreign Income Verification Statement,” for which a revised version requiring additional information is applicable to taxation years ending on or after July 1, 2013. The scope of these additional requirements is known to be broad, but is in a confusing state that is only gradually being clarified.
The new form requires that for each separate property, the taxpayer must state the country code, the maximum cost amount in the year, the cost amount at year-end, and the income reported in the year. As detailed below, this requirement significantly increases the compliance burden: previously, the only specific number required was the total income from all property.
Some relief is available to taxpayers who have made the functional currency election; they will now report the relevant cost amount and income numbers in that currency. However, when income from specified foreign property has been reported on a T3 or T5 from a Canadian issuer, taxpayers are exempt from reporting specific information for that property on the T1135.
However, the T3/T5 exemption has some quirks. Suppose that the taxpayer has specified foreign property with a total cost amount of $120,000, and that T3s and T5s have been issued in respect of all but $50,000 of this amount. One might hope that because the $50,000 is less than the $100,000 threshold, no T1135 form would be required; however, the CRA has stated that the form must still be filed in this situation, and detailed information must be provided with respect to the property with the $50,000 cost amount. In the extreme, if all property meets the exemption, an almost-blank form would have to be filed.
The new reporting requirements raise a number of compliance difficulties and unanswered questions: 
- What level of disaggregation is required for each category of property? For example, if a taxpayer owns a rental property, must it divide the cost amount among the land, building, furniture, and fixtures?
- How is the country code determined? For example, if the taxpayer owns shares of a corporation, is the relevant country the one in which the corporation is incorporated, or does the location of its mind and management also have to be considered? The latter information might not be publicly available.
- Does the maximum cost amount during the year take into account variations in the exchange rate as well as variations in the value of the asset in the foreign currency? The maximum cost amount in Canadian dollars may be at a different point of the year than the maximum cost amount in the foreign currency.
- Determining the maximum cost amount during the year of a partnership interest will be difficult; the taxpayer will have to compute the partnership ACB throughout the year.
- If a taxpayer is reporting foreign property on form T1135 but the income from such property is attributed to another taxpayer (for example, a spouse), must the taxpayer still include the income amount on form T1135?
The form continues (for now) to require paper filing, so some tax practitioners using e-filing (or taxpayers using netfiling) may be inadvertently failing to file the forms. The voluntary disclosure program may be an appropriate option if compliance has been faulty. Failure to file the form, or filing a form with incorrect or missing information, may result in penalties under subsection 162(7). The fine is generally $25 per day, to a maximum of $2,500 (plus interest). A taxpayer who misses more than one year of filings could be subject to multiple $2,500 penalties. The CRA has not been reluctant to apply this penalty in the past, although the penalty was overturned in the case of one non-wealthy taxpayer (Douglas v. The Queen, 2012 TCC 73).
The 2013 federal budget proposes to extend the normal reassessment period when the form is not filed in a timely manner and income from specified foreign property is not reported on the taxpayer’s tax return (see proposed paragraph 152(4)(b.2) in Bill C-4, introduced on October 22, 2013). The need for the penalties under subsection 162(7) appears to be reduced by this amendment, but there has been no indication that the CRA will become more lenient in its application of the penalty.