Introduction – Foreign Bank Accounts
If you own offshore assets such as a bank account or real estate in a foreign country, or are a Canadian resident who has earned income while abroad, you will owe Canadian income taxes on the foreign income and have an obligation to report the offshore assets to the Canada Revenue Agency (“CRA”). Holding offshore property or funds and failing to report them is risky as well as illegal, as the Canada Revenue Agency has increased its scrutiny of taxpayers whom they suspect have overseas interests and has created more onerous foreign reporting requirements. Additionally, if you choose to bring property or funds back to Canada you may still face fines and penalties depending on how you go about repatriating your assets and you increase the risk of an audit by CRA.
In order to bring these funds back in to Canada safely, you will need to properly disclose offshore income and assets to the Canada Revenue Agency or you could face stiff penalties, interest and in some cases even criminal prosecution.
You can qualify for tax amnesty in these circumstances: the CRA runs a tax amnesty program called the Voluntary Disclosures Program (“VDP”), and one of its purposes is to allow Canadians to “come clean” about their overseas accounts and income while removing the risk of prosecution, eliminating penalties and sometimes alleviating interest charges.
Our Canadian tax law firm can help you with the process of repatriating your money and bringing you into compliance with the Canadian income tax system by filing a voluntary disclosure on your behalf. When it comes to foreign assets, one of the main requirements is the T1135 form which taxpayers must file when they own property with a cost over $100,000 outside of Canada. If you decide it’s time to file a voluntary disclosure, you’ll want the help of our experienced Ontario tax lawyers who can work on your behalf to ensure you meet all the new onerous requirements of the T1135 forms that were introduced in 2013.
The Voluntary Disclosures Program and Overseas Income
When the CRA introduced the VDP, one of the main purposes was to give Canadian taxpayers who had money or income earned overseas the incentive to own up to the amounts, pay the taxes owing and rest easy knowing they could access their money in Canada without penalty or prosecution. To date our Canadian income tax lawyers have helped numerous clients safely repatriate their money.
As a part of the Voluntary Disclosures Program, taxpayers are required to meet 4 conditions in order for the voluntary disclosure to be accepted:
1. The disclosure must be "voluntary";
The first condition requires that the taxpayer make the first step towards the disclosure without being prompted by the CRA. If the CRA has been in touch with you about your offshore account, it may be too late for you to file under the VDP. For example, if you hold a bank account in a foreign country and the CRA has sent you a letter requesting information on the account, under most circumstances, you would be disqualified from making a disclosure of that bank account. You may however be able to submit a voluntary disclosure for other offshore assets.
2. The disclosure must be "complete";
Canada's income tax department reserves the power to deny your disclosure if it does not contain full and accurate information. For example if you file a voluntary disclosure but keep certain information secret that may have an influence on how the disclosed amounts should be taxed, the CRA will deny the disclosure based on lack of completeness. So, if you own two bank accounts overseas and file a voluntary disclosure for only one of those accounts, the tax department will deny the disclosure if they find out about the other account.
3. The disclosure must involve a penalty;
A voluntary disclosure will only be allowed if the amounts that you are seeking to disclose would lead to a penalty if discovered by CRA. Penalty can mean anything from a late filing penalty to a gross negligence penalty, so the threshold is quite low for this requirement.
4. The disclosure must contain information that is one year past due or if not one year past due, the disclosure was not made to avoid late filing penalties.
The requirement that the disclosed information be one year past due prevents taxpayers from abusing the VDP to avoid late filing penalties. On the other hand, the CRA will accept disclosures for information that is less than one year past due providing that it is accompanied by information that is one year past due. For example, a taxpayer can submit a voluntary disclosure for several past taxation years including any year that is less than one year past due in one single submission. This is because the CRA will typically only allow one submission under the VDP per taxpayer for their lifetime.
Failure to adhere to all of these conditions will result in the disclosure being denied. Given the harsh penalties involved, the help of our knowledgeable Toronto tax lawyers is necessary to ensure you qualify for the program.
The New T1135 and its More Detailed Reporting Requirements
Those who own property overseas may be surprised to know that while they held that property they may have been required to fill out and submit a T1135 form to the CRA. The T1135 is required to be submitted by taxpayers with foreign property which exceeded a fair market value of $100,000 in a given taxation year. This requirement is intended to discourage tax evasion and over aggressive tax planning.
The T1135 form was first announced in the federal government’s 1996 budget. As a result, Canada’s Tax Act was amended and a requirement to file a T1135 in the above circumstances was created for all tax years beginning with the 1997 taxation year.
Recently, in June, 2013 CRA released a new form T1135 requiring its use for all 2013 taxation years and beyond. However it was soon realized that taxpayers would require more time to adjust to the new requirements and the tax department delayed the application so that it would only apply to taxation years ending after June 30, 2013. In February of 2014, further relief was given when the CRA announced that it was extending the filing deadline for taxpayers who are required to file the new T1135 form until July 31, 2014. This transitional relief was offered to allow taxpayers time to adjust to the new more onerous requirements.
The criteria for filing – taxpayers with more than $100,000 worth of overseas property in total – remains the same. It should be clarified that the $100,000 threshold is based on the cost of the property to the taxpayer, not the current fair market value.
However, the new form T1135 requires much more detail. For example, the new T1135 requires the taxpayer to disclose the name of the bank or other entity that holds the taxpayer’s property, name the country in which the foreign property is held and detail the amount of income generated from that foreign property.
Additionally, when CRA made this administrative change to the T1135, Parliament also amended the Income Tax Act ("the Act") to allow for more aggressive enforcement by CRA against taxpayers who fail to file a T1135 or leave out pertinent information.
Under the old law, CRA would be barred from reassessing a taxpayer beyond a three year period. However, changes to the Act now extend the “normal reassessment period” a further three years if the taxpayer is late in filing the T1135 or makes a misrepresentation on their form. It is important to note that the CRA can use this new extended limitation period as it pertains to foreign income to open up and reassess a taxpayer’s entire Canadian income tax return.
Canadian Tax Lawyer Help
As you can see, the changes to the foreign income reporting form T1135 create a difficult landscape for taxpayers to navigate on their own. If you have unreported income or property in a foreign country, you’ll want the benefit of our experienced Canadian income tax lawyers to help you repatriate your money safely and without serious consequences.
If you have money or property overseas and want to ensure that you can access it here in Canada, give one of our experienced Ontario tax lawyers a call. We can help you through all stages of the process including filing a voluntary disclosure on your behalf, conducting negotiations with the CRA and getting a reasonable payment plan in place for taxes you may have owing from income on the foreign property.
"These articles provide information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."