Tax Obligations for Canadians With Foreign Assets: T1135

Canadians who own foreign securities (including US-listed), crypto, and real estate or have cash in a foreign bank account may have to file extra tax paperwork at some point in their lives.

One such piece of paperwork is the Canada Revenue Agency's "T1135" which covers Specified Foreign Property. This is due every year as part of your filing commitment if you meet the criterion.

What is the cryptically named "T1135" and when might you need to file one?

The Canada Revenue Agency's T1135

A T1135 reports what's referred to as "Specified Foreign Property". Property in this context does not mean just real estate. It can be anything from a piece of art to cash in a bank account to crypto.

The T1135 is not a tax return. You will not be taxed on what you disclose in it, even though the form itself is titled "Foreign Income Verification". However, every Canadian tax resident is obliged to file one if they meet a simple criterion. That criterion is having more than CAD$100,000 in aggregate of Specified Foreign Property on a cost basis.

You can read the definition of cost basis listed under "cost amount" in Section 248 of the Income Tax Act.

For those who have more than CAD$250,000 of Specified Foreign Property on a cost basis, the reporting requirements become a little bit more thorough.

Here are some examples of what might need to be included in a T1135.

Foreign Stocks, Bonds and ETFs

This one is a little tricky. Not all foreign securities are deemed Specified Foreign Property.

Canada-domiciled companies listed on foreign stock exchanges are not subject to T1135 reporting. Therefore, any company with an interlisting does not count towards the CAD$100,000 cost-basis criterion. A good example of this might be Royal Bank which is listed on both the TSX and NYSE.

If you hold foreign stocks in a Canadian non-registered brokerage account (i.e. not an RRSP, RRIF, TFSA, RDSP etc.), they are reportable once you hit the threshold. As an example, if you had CAD$120,000 of Microsoft shares in a USD cash account at a brokerage in Canada, that is now Specified Foreign Property and needs to be reported on a T1135 every year.

Finally, any stocks held in a foreign brokerage account, even if those stocks are Canadian-listed securities, are reportable if they meet the CAD$100,000 threshold. Remember, the threshold is the aggregate of all your Specified Foreign Property across all sources.

Care should be taken to understand the legal structure of what you are investing in when it comes to foreign assets. For example, some European ETFs are legally organized as a trust. A distribution from a trust might trigger the need to file a T1142 with the CRA.

Vacation and Rental Properties

Vacation and rental properties are an interesting case for a T1135.

If you have a property abroad that is for your exclusive use, that's considered personal use property and a T1135 is not required.

If you have a property that you mostly rent out, that is likely Specified Foreign property and should be reported.

If you offset the costs of your vacation home by renting it out a little bit, you will also likely be exempt as it's again personal use property.

For more information, see this section on T1135 reporting on the CRA website.

Crypto

Good news, your crypto [likely] lives on the blockchain. Bad news, where is the blockchain?

There is a great deal of debate in the Canadian tax community about this. The CRA currently provides no clear guidance on exactly how to handle the situation, other than that if the assets are held in Canada, you may not need to file a T1135. But is crypto held in Canada even if bought through a Canadian exchange or sitting in a cold wallet in Winnipeg?

John Oakey tackled this subject for CPA Canada in 2023 and wrote:

In Canada, we don’t have any tax reporting mechanisms specifically designed for cryptocurrency reporting. We do however, have a self-reporting system for specified foreign property (T1135 ), and CRA does consider cryptocurrency to be specified foreign property if the cryptocurrency is situated, deposited or held outside of Canada and not used exclusively in the course of carrying on an active business. The problem taxpayers are facing with categorizing cryptocurrency as specified foreign property is where exactly is cryptocurrency located? With no guidance from the CRA on the actual location of cryptocurrency, taxpayers are left making their own decision—report or not report.

So, someone who is not trading crypto as their profession is left with a dilemma: to report or not to report? You should get professional advice here on your specific situation from someone who is familiar with crypto taxes in Canada. See the Penalties section further on in this article for the ramifications of making a mistake here.

One clear thing, though: Canadian tax residents are taxed on worldwide income. You still need to report income on your tax return from your crypto trading and taking.

Some Foreign Pensions

I recently counselled a friend on this. Her parents recently became Permanent Residents of Canada, and their first-ever tax return was due for the 2023 tax year.

In the country they are from, there are two types of pension available. Both are run by their government. The first one is a traditional social security structure where you pay into the system and then get a defined benefit pension amount on retirement that's paid by the government.

The second is a pension scheme administered by the government, they collect contributions, but you have a privately managed "pension pot". An investment manager of your choice invests these proceeds based on a contributor-selected risk profile. All the money in the pot belongs to you and this is more like a defined contribution plan.

Because her parents had chosen the latter option above when they set up their government pension, I explained that this is likely considered Specified Foreign Property as it's an investment attributable directly to her parents. It should be included on each parent's future T1135 (see New Immigrants below). Remember, there's no tax payable here, so err on the side of caution.

When Is a T1135 Not Due

Anything held in an RRSP, TFSA, or other registered account is generally exempt from being reported, even if it qualifies as Specified Foreign Property.

A Canadian mutual fund or ETF that is a "fund of funds" with underlying US securities is generally exempt, even if held in a non-registered account.

Anything that is normally used in carrying out the functions of a business is generally exempt.

How To Calculate Your T1135

T1135 reporting is based on the cost basis of the assets involved, not their market value. In other words: what originally paid for the asset.

Bob bought a condo in Mexico in 2007 for CAD$85,000. He paid CAD$20,000 for Apple (AAPL) stock in 2015. And he keeps around CAD$2,000 in a bank account in Mexico to cover the upkeep of his condo. The aggregate cost basis is CAD$107,000. Therefore Bob needs to file a T1135 that tax year.

New Immigrants

In your first tax filing year as a new immigrant, you are not required to file a T1135. However, be aware that the cost basis of next year's T1135 (which you will have to file) will become the fair market value of the Specified Foreign Property on your immigration date.

For example: Alejandro moved to Canada in 2022. He did not have to file a T1135 for the 2022 tax year. But he held securities in Mexico. They originally cost less than CAD$100,000. For his 2023 tax return, he looked at the market value of the securities on the day he moved to Canada and saw they were worth more than CAD$100,000. He therefore reported the securites and their value on his T1135 for that tax year.

When In Doubt

Because you're not paying tax on what you're reporting on a T1135, a good strategy is: when in doubt, fill it out! You likely will not cause any issues over-reporting property, other than a possible follow-up from the CRA.

If a tax professional is preparing your return, they will often ask if you have Specified Foreign Property and help you file the form.

Penalties

Despite not being part of your actual tax return, a T1135 is due with your tax return every year.

The penalty for not completing and filing one is $25/day for the first 100 days after it is due. Or $2500 per tax year. If you are married and your spouse is also required to report, you can double those fines.

Unfortunately, after 24 months the penalties become more severe.

162(10.1) – Additional penalty – After 24 months, the penalty becomes 5% of whichever of the following resulted in the requirement to file the information return, less any penalties already levied: the cost of the foreign property; the fair market value of the property transferred or loaned to the trust; or the cost of the shares and indebtedness o

Not filing a T1135 when it was due because you did not know it was required is not a defence in the eyes of the CRA.

Voluntary Disclosure

If you have found that you should have been filing a T1135 for several years and are now years in filing arrears, you may want to consider the Canada Revenue Agency's Voluntary Disclosure Program.

T1135 issues are eligible for the program and may allow you to avoid penalties and interest. Talk with a trusted tax advisor about your situation.

Planning Opportunity

Canadians who want to invest in the U.S. might want to weigh up the cost of filing paperwork such as a T1135 if they are using non-registered accounts. For example, buying a U.S.-domiciled ETF seems attractive as they generally carry lower fees. But the savings in fees might be quickly eaten up if you have to use an accountant to prepare your taxes and file a T1135.

Always Get Professional Help

For T1135, T1142 and other CRA matters, most good Canadian accountants can provide clarity. The Canada Revenue Agency can also provide opinions on whether the property falls under the umbrella of Specified Foreign Property.

This article was reviewed by our friends at The Tax Heroes (taxheroes.ca or @TheTaxHeroes on twitter/X). Whilst every effort is made to make sure this information is complete and accurate, it is not advice and you should talk to a professional about your circumstances.