Canada is home to many people who have assets and income in other countries. Some Canadians work abroad, others have foreign pension income, and many have investments outside the country. In this era of globalization, worldwide income is common, and this income needs reporting and accountability.
Who Needs to Report Foreign Income and Assets?
Canadian Residents
The Canadian tax system operates on a residency basis. The Canada Revenue Agency (CRA) has a set of rules that determine whether you are a resident or non-resident for income tax purposes. This residency status can change the way you file income tax returns and pay taxes in Canada. Note that your tax residency status is not necessarily the same as your residency status for immigration purposes.
Canadian residents are required to report worldwide income. This means that any income a Canadian resident receives is likely taxable in Canada regardless of the country the income came from. However, depending on the type of income and the source country, the source country may tax that income first. When income is taxable in a foreign jurisdiction, you can usually claim a foreign tax credit to reduce your Canadian tax liability. For example, if you receive $1,000 of dividends from a US corporation in your non-registered account, $150 of US tax will likely be withheld on that income. This $150 of tax paid in the US will reduce the amount of tax you pay in Canada on those dividends. The tax treaties that Canada has negotiated with other countries determine which country taxes each type of income with the goal of ensuring that the same income is not fully taxed twice. To benefit from the foreign tax credit, foreign income needs to be reported on your Canadian return.
Non-Residents
People who are not residents of Canada will need to pay Canadian tax on certain types of Canadian income. Most income going to non-residents should have tax withheld before it is paid. A Canadian tax return is required to be filed if:
- You have tax to pay for the year
- You want to claim a refund
- The CRA sent you a request to file a return
- You realized a capital gain or disposed of certain types of Canadian property during the year, or
- You want to transfer unused tuition fees or carry forward unused tuition amounts to a future year.
Sometimes even though a return is not required, it is in your best interests to file one. For example, if you own Canadian property that generates rental income, the payer or agent, such as the property manager, must withhold 25% of the gross rental income paid or credited to you. However, you can choose to file a return to elect under section 216 of the Income Tax Act. This return will allow you to claim the expenses relating to the rental property (property maintenance, mortgage interest, etc.) and pay tax on the net rental income instead of the gross. This should yield a lower amount to pay overall.
Reporting Foreign Income for Canadian Residents
Foreign income refers to any earnings outside of Canada, such as:
- rental income from properties located abroad,
- dividends and interest earned in non-Canadian accounts, and
- wages or salaries earned while working in a foreign country.
Each type of foreign income needs to be reported in the proper section of your Canadian tax return. If some of the income is exempt from Canadian tax under the tax treaty with the source country, then the applicable corresponding deductions should also be calculated and claimed.
Reporting Foreign Assets – Form T1135
In addition to reporting foreign income on your personal tax return, if you own specified foreign property with a total cost of more than $100,000 CAD, the details must be reported on form T1135. This form is due on the same day as your personal tax return and carries penalties from $100-$2,500 if it is filed late.
Specified foreign property includes tangible or intangible property held outside of Canada. For example:
- Overseas bank accounts: Personal or business accounts held in financial institutions located in other countries.
- Investments in foreign stocks, bonds, or mutual funds: Shares in companies or funds based outside Canada (even if they are held in a Canadian brokerage account), or any investments held in a foreign brokerage account. This includes shares in Canadian companies if they are held with a broker located outside the country but excludes investments held in registered accounts, such as RRSPs, RRIFs, and TFSAs.
- Real estate properties outside Canada: Rental properties that earn passive income. It excludes property being used for personal (vacation home) or business use (your office, warehouse, factory) actively.
- Other specified properties: These could include shares of non-resident corporations, interests in foreign trusts, debt owed to you by a non-resident or ownership in foreign insurance policies.
Whether it is an Indian Bank account, investment property in the United Kingdom, or Chinese stocks, you must disclose these assets if the total cost of all your specified foreign property is over $100,000 CAD.
Suppose you have $50,000 in a UK bank account and invested $51,000 in Indian stocks. Even though none of the two foreign assets cross the $100,000 threshold, you must disclose both assets as they cross the threshold together.
Certain types of personal-use property are excluded from the T1135 reporting requirements. For example, personal vehicles, clothing, jewelry, or artwork outside Canada do not need to be reported, even if their value exceeds $100,000. Similarly, as mentioned above, assets held in registered accounts like RRSPs or TFSAs are not considered specified foreign property.
How Does the CRA Track Offshore Assets?
Wondering how the CRA will know what you earned in the United Kingdom? The CRA uses several tools and international agreements to identify undeclared offshore assets and income. The CRA receives financial information from foreign institutions through the Common Reporting Standard (CRS). For example:
- If you hold a bank account in the United Kingdom with a balance of $150,000, the CRS requires the bank to report this information to the CRA.
- Suppose you earned $5,000 in interest income from this account and failed to report it. The CRA would flag this omission, which would lead to potential penalties.
These agreements enable the agency to uncover undisclosed accounts, ensuring compliance and addressing tax evasion. Failing to report foreign income or assets can lead to severe penalties. Recent legislative changes have expanded the CRA’s powers, allowing it to recover unpaid taxes from foreign assets through international agreements.
Tips for Managing Foreign Income and Asset Taxation
Reporting and filing income tax in one country is complicated, and reporting in more than one country is even more difficult. Hence, it is imperative for taxpayers to
- Keep Detailed Records: maintain accurate foreign assets and income documentation. It should include all statements, receipts, and tax returns from other countries.
- Understand Reporting Thresholds: be aware of the $100,000 threshold for reporting foreign assets.
Disclosing your offshore income and assets accurately is critical to avoiding penalties. Misreporting or failing to disclose can lead to significant fines and legal consequences. Diligence and transparency are critical when reporting all income and assets, including those from outside Canada.
Contact McCay Duff LLP in Ottawa for Reporting Foreign Income and Assets
Need help with reporting foreign income? Talk to a professional tax expert to help you understand your obligations. At McCay Duff LLP, our tax experts can provide services, including advice and filing for foreign income and assets. To learn more about how McCay Duff LLP can provide you with the best taxation expertise, contact us online, by telephone at 613-236-2367 or toll-free at 1-800-267-6551.
