I have a friend who owns a sizeable portfolio of individual foreign stocks. He is happy about the returns. Global stocks having outperformed Canadian stocks in the last few years. But, owning individual foreign stocks comes with an additional burden: my friend must file form T1135 Foreign Income Verification Statement every year.
This form must be filled by Canadian resident individuals, corporations and trusts if at any time during the year, they own specified foreign property (SFP) costing more than $100,000 in aggregate. This $100,000 threshold is not based on the fair market value, but on the adjusted cost base of the SFPs, in Canadian currency.
The purpose of this form is not to tax, but to inform the Canada Revenue Agency (CRA) of the foreign property that a Canadian taxpayer may own.
Although this article will concentrate on foreign publicly traded stocks, many other assets can qualify as an SFP. Foreign bank accounts, shares of private foreign corporations, real property located outside of Canada and life insurance issued by a foreign insurer are examples.
The basic procedure
The CRA has a two-tier information reporting system for specified foreign property. The basic procedure, called the simplified reporting method, is for taxpayers who hold, at any time during the year, foreign stocks (that are SFPs) with a total cost of more than $100,000 but less than $250,000 (in Canadian dollars). Under this method, taxpayers need to check a box to identify the type of SFP held during the year (e.g. bank accounts, shares of a corporation, debt, real property, etc. held outside of Canada). There is no need to detail each individual stock held. Taxpayers simply need to identify the top three countries where they have SFPs, using the aggregated value for each country where the SFPs are held during the year.
The taxpayer also needs to disclose the total income received from all SFPs held during the year, as well as the gains (losses) derived from the sale of the SFPs during the year.
Cost would be the acquisition cost of the property. If you immigrate to Canada, the cost is the fair market value of the property at the time of immigration. Similarly, if you received the SFP as a gift or inheritance, the cost is its fair market value at the time of the gift or inheritance.
This method, while simpler, still requires some significant work: the taxpayer will need to calculate the maximum month-end cost amount during the year, using every monthly investment statement, and aggregate the cost for the top three countries in which they hold SFPs, including foreign stocks. They will also need to “isolate” the income generated by SFPs from other income received during the year, and the gains (losses) derived from the SFPs from the other gains (losses) generated from the taxpayer’s portfolio.
For specified foreign property (e.g. stocks) valued above $250,000, reporting becomes more detailed
The requirements are much more onerous if the total cost of all SFPs, at any time during the year, above $250,000. Under this more detailed method, taxpayers are required to provide the following:
- details for each SFP held during the year;
- the location of the SFPs (using a country code);
- the maximum cost of the SFP during the year;
- the cost of the SFPs at the end of the year; and,
- any income generated and any gains (losses) generated by the SFPs during the year.
If the SFPs are held in an account with a Canadian registered securities dealer, taxpayers are allowed to aggregate and report the foreign stocks on a country-by-country basis. The amounts that have to be reported are the highest fair market value during the year (this can be based on the highest month-end fair market value that appears on the investment statements) and the fair market value at the end of the year (also reported on a country-by-country basis). Taxpayers also must report the income earned on the foreign stocks, on a country-by-country basis, as well as the total gains (losses) realized on the disposition of these stocks during the year, on a country-by-country basis.
Note that the amounts reported should be determined in the foreign currency and then converted into Canadian dollars. Generally, when converting amounts from a foreign currency into Canadian dollars, use the exchange rate in effect at the time of the transaction. If you received income throughout the year, an average rate for the year is acceptable. However, to determine the maximum fair market value during the year, a taxpayer can use the average exchange rate for the year; to determine the fair market value at year-end, the exchange rate at the end of the year is used.
So imagine, an investor, such as my friend, who owns a diversified portfolio of 20 to 25 foreign stocks from corporations based in the U.S., UK, Germany, France, Netherlands, Switzerland, Japan and China. What would he need to do to comply with the requirements of the T1135? First, every month, after he receives his monthly investment statement, he would need to calculate the value of each position on a country-by-country basis, using the proper country code. He would also need to determine the income received from each foreign stock, on a country-by-country basis. At the end of the year, he would then need to determine:
- the year-end value of each foreign stock, on a country-by-country basis; and
- the maximum value of foreign stocks throughout the year, on a month-by-month basis and on a country-by-country basis; and,
- he would then calculate the income received during the year, and the gains/losses generated on each stock, again on a country-by-country basis.
Simple, isn’t it?
In such a case, it requires many hours a year to properly file the T1135. My friend, who maintains such a portfolio, estimates that it takes him approximately 15 to20 hours per year to properly document and file this form. He could delegate this task to his accountant or tax preparer, but he would end up paying significant fees.
Is there a solution to this burden? Possibly. For an investor who wants exposure to foreign equity markets, using a Canadian regulated mutual fund (either in trust version or in corporate class version) or a Canadian regulated segregated fund would eliminate the need to file the T1135 form. This would provide foreign diversification, and save him or her approximately 15-20 hours a year in filing work. Furthermore, using mutual or segregated funds may avoid potential penalties. The penalty for not filing the T1135 properly can go as high as $2,500 per year. There are additional penalties if the taxpayer knowingly or negligently fails to accurately fill in the form.
As a portfolio of foreign stocks increases, so does the expense related to its accounting. This is normal and expected. But, once the total cost of your SFPs is above $250,000, the tax reporting work increases dramatically. The burden imposed on the taxpayer can be significant. Investors may consider using a Canadian regulated mutual fund that invests in foreign markets to lessen this reporting burden.
Information and opinions contained in this commentary are intended for investors as general information and has been compiled from sources believed to be reliable but no representation or warranty, express or implied, is made with respect to their timeliness, accuracy or completeness and SLGI Asset Management Inc. disclaims any responsibility for any loss that may arise as a result of the use of the strategies discussed. Views contained in the commentary expressed by SLGI Asset Management Inc. are subject to change without notice and are provided in good faith without legal responsibility. The commentary is not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard and does not constitute a specific offer to buy and/or sell securities.
This commentary is not a substitute for professional advice or services. The example presented is hypothetical in nature. The example includes certain material factors or apply certain assumptions to draw conclusions believed to be appropriate in the circumstances, but are not intended to represent an investor(s) personal scenario. Prior to making any decisions or taking any action, investor(s) should conduct a thorough examination of their circumstances with your advisor(s) prior to implementing any of the strategies discussed herein. Each investor(s) will have individual personal income or tax situations that may have additional complexities outside the scope of materials discussed in this commentary.
The Sun Life Global Investments Corporate Class mutual funds each represent a separate class of shares of Sun Life Global Investments Corporate Class Inc., a mutual fund corporation.
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
Sun Life Global Investments is a trade name of SLGI Asset Management Inc., Sun Life Assurance Company of Canada and Sun Life Financial Trust Inc.
SLGI Asset Management Inc. is the investment manager of the Sun Life Mutual Funds, Sun Life Granite Managed Solutions and Sun Life Private Investment Pools. Sun Life Assurance Company of Canada is the issuer of guaranteed insurance contracts, including Accumulation Annuities (Insurance GICs), Payout Annuities, and Individual Variable Insurance Contracts (Sun Life GIFs).
© SLGI Asset Management Inc., Sun Life Assurance Company of Canada, and their licensors, 2021. SLGI Asset Management Inc. and Sun Life Assurance Company of Canada are members of the Sun Life group of companies. All rights reserved.