Our Canada Revenue Agency (CRA) has been guilty of many things but on the top of my personal list are cryptic requirements. One example stands out – can the tax filing process and foreign income reporting requirements be any more confusing?
To help demystify these requirements for my own purposes, I’ve broken down the rules and exemptions into some questions and answers. These Q&As are not meant to be inclusive of all tax situations, it is not advice, but they should steer you in the direction for further professional consultation. Which leads me to this: I encourage you to consult a professional any time you are unsure of your tax situation. I would like to thank Mark Goodfield who is the tax partner and the managing partner of Cunningham LLP in Toronto and writes a great resource, a blog called The Blunt Bean Counter for providing some general feedback on my post today.
What does the law say about foreign income reporting anyhow?
At the time of tax filing, Canadian individuals, corporations, partnerships and trusts need to report on the “property” held outside Canada.
What does “property” mean?
It can mean many things, here are a few:
- Money held in foreign bank accounts
- Shares in non-Canadian companies held with a Canadian broker, such as U.S. stocks
- Shares of Canadian companies held with a foreign broker
- Land and buildings held outside Canada, such as a rental property in the U.S.
- Debts owed to you by non-Canadian residents, such as a mortgage loan
- Precious metals, gold certifications or futures held outside Canada
What are the reporting criteria?
If the total cost amount (Note: not fair market value) of property held outside Canada exceeds more than $100,000 CDN at any time during the tax year, you need to file a form at tax filing. The form you need to file is a T1135 form called Foreign Income Verification Statement.
Q1: My house is worth over $100,000 CDN but my investments are not. Do I even need to worry about this requirement?
Q2: I have a self-directed RRSP that I keep my U.S. stocks like Coca-Cola (KO:US) in. These shares are now worth about $105,000 CDN. Do I need to worry about this requirement?
No. U.S. stocks inside an RRSP are exempt from the foreign income reporting requirement.
Q3: I keep my U.S. stocks like Procter and Gamble (PG:US) and my U.S.-listed Exchange Traded Funds (ETFs) like VTI in my TFSA. The values of these U.S. holdings are worth about $110,000 CDN. Do I need to worry about this requirement?
No. Securities held in these registered Canadian accounts are exempt from foreign income reporting: RRSPs, TFSAs, RESPs, RRIFs, LIRAs, LRIFs and RPPs.
Q4: I own a joint USD bank account with my wife, we use it for travelling to the U.S. every winter and abroad for a few months. It has about $15,000 USD in it at all times, sometimes up to $20,000 USD in it. Do I need to worry about this requirement?
No. However, keep in mind the CRA considers each person’s foreign ownership to be based on the amount contributed by each person. So as long as you don’t surpass the $100,000 CDN threshold individually, you’re fine.
Q5: I just bought a condo in Florida. It cost me about $150,000 USD and it’s probably worth closer to $175,000 USD now. Do I need to worry about this requirement?
Yes and No.
Yes, if you plan to rent out the condo when you’re not in Florida. CRA requires you to report foreign income when you expect a profit or income from a foreign property that is not intended primarily for personal use. Even if you live in the condo during the entire Canadian winter, but decide to rent it out for the other 6-9 months, you need to complete a T1135 form at the time of tax filing.
No, if you plan to use the condo primarily for personal use. For example, you are there for the majority of the year and you rarely rent it out. If and when you do rent it out, it’s only to family and their friends. CRA does not require you to report foreign income when you or someone else related to you uses the foreign property only for personal use and enjoyment.
In either case, I think it would be very smart to keep good bookkeeping records for as long as you own the foreign property to justify your intentions.
Q6: I keep all my U.S.-listed ETFs like VTI and VWO in my non-registered account. I have $90,000 CDN in this non-registered account but I have about $12,000 USD in a bank account. Do I need to worry about this requirement?
Yes. With the $90,000 CDN held in your U.S.-listed ETFs and the $12,000 USD sitting in a bank account, you’re over the $100,000 CDN threshold for foreign property. You need to complete a T1135 form at the time of tax filing.
Q7: I bought a house with my brother overseas this year, he lives in the UK. He didn’t have money saved up so I co-signed the mortgage with him. My brother owes me $80,000 CDN on the house – he is going to be paying me back over the next 10 years. Do I need to worry about this requirement?
In this case you do not need to report the debt. However, indebtedness owed to you by non-Canadian residents is subject to foreign income reporting requirements but since your brother in the UK owes you $80,000 CDN, the mortgage loan is under the $100,000 CDN threshold; you’re off the hook. Your brother however, based on his debt to you, is certainly not!
Q8: I own a few Canadian ETFs; one of them is the ETF XSP. Buying XSP cost me $105,000 CDN. I own XSP outside my RRSP and TFSA in an unregistered account. Do I need to worry about this requirement?
No. While this is a Canadian security that holds U.S.-listed stocks, because XSP is a Canadian-domiciled trust, then you not need to worry about the foreign property requirement.
These Q&As provided above could relate to your situation but in the end they are just examples. I wrote this article to start wrapping my head about the overly complex issue of foreign income reporting and hopefully in the process this post has helped you as well. When in doubt or better still when you want to confirm the tax implications of any investment, I encourage you to seek out the direct advice from a tax professional. The wrong information could put you in very hot water with the Canada Revenue Agency (CRA) suffering penalties not to mention other financial hardships.
Before this post, did you know about foreign income reporting requirements? As an investor, do these requirements apply to you?