Specified Foreign Property Explained
If you’ve ever owned a specified foreign property costing C$100,000 or more in any tax year, you must report the assets to the Canada Revenue Agency (CRA). You will have to fill out Form T1135 when filing your annual income tax returns.
As a Canadian, it’s essential to understand all your tax obligations, especially if you own income-generating assets in Canada and other countries. That means you must know the rules for foreign property reporting. So, what laws govern foreign income reporting?
If you have trouble understanding your obligations to report your foreign-earned income, worry no more.
This guide explores the basics of specified foreign property, including what it means, the assets involved, and the consequences of not reporting the income.
That said, let’s get started!
What is Specified Foreign Property?
If you’ve never reported any of your foreign property to the CRA, you may wonder what specified foreign property is.
Any property owned overseas to generate income is considered a specified foreign property, and it can be an asset or other investment.
The primary purpose of your foreign-owned property determines whether it’s a specified foreign property or not. While you might think that property refers to only real estate, it’s not the case for specified foreign property.
Here are the other forms of specified foreign property:
- Shares in foreign corporations
- Cash held in foreign bank accounts
- Interests from non-resident trusts acquired for consideration
- Life insurance policies provided by foreign insurance companies
- Other forms of income-generating properties located outside Canada
- Bonds and debentures issued in foreign countries or by foreign governments
Now that you understand what the CRA specified foreign property entails, you need to know the total cost of property subject to specified foreign property reporting.
According to the Canada Revenue Agency (CRA), you need to report all your foreign properties when the total cost adds up to C$100,000 in a particular tax year. Notably, you must provide detailed information on the foreign property you report.
For example, if your foreign investment portfolio shows that your shares in foreign corporations have a cost basis of C$100,000 or above, you must report it to the CRA. In this case, the cost basis refers to the total amount you paid to buy the shares.
Which Assets Are Not Considered Specified Foreign Properties?
So far, you already know that foreign assets used to generate income are subject to specified foreign property reporting. What assets are not considered specified foreign properties? Here are some assets not reported as specified foreign properties:
- Assets in registered accounts like RRSPs, RESPs, RDSPs, TFSAs, and RRIFs
- Vehicles, vacation homes, jewelry, artwork, or other property for personal use
- Mutual funds invested in foreign securities and held in foreign currencies
- Property used for active business purposes like managing business inventories
Form T1135: Where to Report the CRA Specified Foreign Property
Also called the Foreign Income Verification Statement, Form T1135 specifies all the requirements you should fulfill when reporting your specified foreign property.
The T1135 form includes two parts with different reporting structures.
Part A of the form applies to foreign properties costing less than C$250,000 and more than C$100,0000 in a particular tax year. When reporting, the taxpayer must indicate the following:
- Type of foreign property
- Total income generated from the specified property throughout a tax year
- Total gains or losses after the disposition of your specified foreign property
Part B of Form T1135 applies to Canadians who could have held specified foreign property costing $250,000 or more within a specific tax year. Here, the taxpayer must provide more detailed information on the specified foreign property. This part comprises seven categories corresponding to the types of specified foreign property, namely:
- Cash held outside Canada
- Indebtedness owed by non-residents
- Shares from non-resident corporations
- Interest from non-resident trusts
- Real estate property outside of Canada
- Other property located outside of Canada
- Property held with a Canadian trust company or registered securities dealer
When reporting your specified foreign property held with a Canadian trust company or registered securities dealer, you will need to provide the following:
- Name of the registered trust company/security dealer
- Total income or loss on the property during a particular tax year for every country
- Country codes for every country reported in Form T1135
- The fair market value of the property at the end of the year
So, what does the C$100,000 threshold mean for a specified foreign property?
The C$100,000 annual threshold on the specified foreign property doesn’t apply to its income. However, Canadians must also report their foreign income when filing tax returns annually. In other words, Canadians whose specified foreign properties cost less than C$100,000 don’t need to report the assets to the CRA.
What happens if you sold some of the property before the end of a particular taxation year? In this case, you’ll still have to file Form T1135, provided the total cost of your specified foreign properties was C$100,000 or more at any time during the tax year.
Pro Tip: The C$100,000 threshold applies to the total cost of acquiring the specified foreign property and not its current fair market value.
What Happens If You Don’t File Form T1135?
Failing to report the property comes with many harsh penalties, depending on whether the failure was intentional or unintentional.
If you intentionally failed to report your specified foreign property costing C$100,000 or more, you’ll pay a penalty of C$500 monthly, up to a maximum of C$12,000. However, if unintentional, the penalty will be $25 daily, up to a maximum of C$2,500 each tax year.
The penalty increases by C$25 for every late day for unintentional failure to report specified foreign property. The CRA has reported more than 20 cases of late-filing penalties, but most of these cases were unintentional.
When to Report Your Specified Foreign Property
As mentioned earlier, late reporting of specified foreign property can lead to hefty penalties. For that reason, it’s imperative to remember the reporting dates.
The good news is that the due date for reporting specified foreign property is the same as filing your income tax return, making it easier to remember. So, as you file your tax returns, you can always report your specified foreign property for the tax year.
Usually, the deadline for reporting specified foreign properties is April 30 for taxpayers in the individual category. For self-employed individuals, the due date is June 15. But for corporations, it is often not later than six months at the end of their fiscal period.
Final Words
As a Canadian taxpayer owning specified foreign property in other countries, you need to report the assets to the CRA if the total cost is worth C$100,000 or more. Failure to do so will attract hefty penalties.