May 20, 2022
By: Matthew Boyd, Associate, Farber Tax Law
Taxpayers with foreign assets may have reporting obligations of which they are unaware. Form T1135 requires taxpayers to report certain types of assets held offshore once a cumulative threshold amount is met. Failure to file Form T1135 may result in onerous penalties and interest. This article provides a brief overview of Form T1135 and the types of property which must be reported.
There are two criteria that must be met before a taxpayer is required to file Form T1135 for a taxation year. The first criterion is that the property needs to be “specified foreign property”. Specified foreign property includes, but is not limited to, foreign real estate, assets held in a foreign bank account and shares of a foreign corporation. However, if offshore property is used personally by the taxpayer, it may be exempt from reporting obligations.
Consider the following example. If a taxpayer owns a vacation home in another country but uses it primarily for their personal use and enjoyment, the property should be exempt from reporting obligations. In contrast, if the taxpayer owns a foreign apartment complex that was rented throughout the year, the taxpayer is required to report the property. The taxpayer is required to report the apartment complex because it is used to produce income, and is not used for their personal use and enjoyment
The second criterion relates to the threshold amount that must be reported. For property to be reported the cost basis of the property must be greater than $100,000. For example, if the property is purchased for $50,000, its cost basis will be $50,000 for the purposes of T1135 reporting obligations. Even if the property accrues in value in subsequent years and its fair market value exceeds $100,00, the property will not need to be reported because the cost basis remains $50,000. It is important to note, Form T1135 reporting obligations are based on the cumulative cost basis of all specified foreign property that a taxpayer holds in a taxation year.
The discussion in this article is not exhaustive, and each taxpayer’s situation is unique. Even if a taxpayer has failed to file Form T1135 for previous taxation years, remedies may be available to provide relief from penalties and interest. For example, the taxpayer may submit an application to the Voluntary Disclosures Program to rectify the omission. Taxpayers should consult their tax advisor first to determine if their T1135 reporting obligations have been met.