Whether you have suddenly inherited a bank account overseas, or have owned foreign real estate for years, Canada requires you to report your foreign assets and income on your annual federal tax returns. Many people are wary of this portion of their return, thinking to themselves: why do they want to know? Are they going to tax me even more? The truth is that most people won’t owe any additional tax as a result of this reporting, but there are stiff penalties associated with failing to report.
All Canadian residents that owned foreign property of any kind, at any time during the year, should check and make sure whether it needs to be reported on their Foreign Income Verification Statement as part of their federal tax return for that year. This reporting is purely for tracking reasons and not for calculating a tax on the property.
Only certain types of property must be reported. This is called “specified foreign property”, and includes the following:
- Money held outside of Canada
- Intangible property, such as patents, held outside of Canada
- Precious metals, gold certificates, and futures contracts held outside of Canada
- Shares of a corporation that is not resident in Canada
- Shares of a corporation that are held outside Canada, even if the corporation is in Canada
- Certain interests in non-resident trusts
- Certain interests in a partnership that holds specified foreign property
- Property that confers a right to acquire specified foreign property
- A debt, such as a mortgage, owed to you by a non-resident
- An interest in a foreign insurance policy
There are some important exceptions to the reporting requirement. For example, if the cost amount of all the foreign property you owed at any point during the year, added up, totals less than $100,000, then you do not need to report any of it. You also do not need to report “personal use property”, which is essentially anything used primarily for the enjoyment of yourself or your immediate family, such as a vacation home that is not rented out, or collectibles like art, jewelry, and rare books. Other exceptions may apply as well.
Property totalling more than $100,000 but less than $250,000 can be reported using a “simplified” method that does not even require you to identify the individual pieces of property, just report their total worth and which country they are in.
You must also report any income you earn from foreign property, no matter how small the amount, and even if the property itself is not reportable. For example, if you own an apartment in Turkey that is worth $80,000 and is your only foreign asset, and the apartment gives you a rental income of $400/month, you do not need to report the apartment itself but you do need to report the rental income.
You may or may not owe tax based on reporting your foreign income, depending on where the income was earned. Many countries have a tax treaty with Canada that alleviates double-taxation, so that for example you may owe no tax because you already paid it in the foreign jurisdiction, or you may only owe the difference if the equivalent taxes in the foreign jurisdiction are lower than they would be in Canada.
Penalties and Corrections
Failing to report foreign property or income can result in pretty stiff penalties. Failing to file the foreign income statement as part of your tax return will run you $25 per day up to a maximum of $2,500. Knowingly or negligently failing to disclose information on the return is $500 per month to a maximum of $12,000. After 24 months of failing to file, you incur another penalty of 5% of the value of the foreign property. There may be other penalties besides. For an individual, it is highly likely that the risk of these penalties far outweighs any additional tax owing that reporting them might incur.
If you realize you have failed to report foreign income or property, and the CRA has not yet made any demands on you to do so, you may be eligible to correct your error by making a voluntary disclosure through the CRA’s “Voluntary Disclosure Program”. This can wipe away the potential penalties and merely leave you with any tax owing on unreported income (and of course, the interest on the unpaid tax).
This article is just an overview, and there are more details to take into account. If you have property or income overseas and are not sure whether or how to report it, or need to make a voluntary disclosure to correct a reporting oversight or error, consider seeking professional advice.