Why the fuss about reporting requirements? The ministry responds

I read your article about the need to report specified foreign property on a T1135 Foreign Income Verification Statement. Why on earth is it necessary to report ownership of shares of mainstream American companies traded on the New York Stock Exchange when the shares are all held in my bank brokerage account? Did you get any comment from the Minister of Finance?

Well, not from Mr. Champagne himself.

But in an e-mailed statement, Marie-France Faucher, deputy spokesperson at the Department of Finance, said the T1135 reporting requirement (Canadians need to report certain foreign assets if their total cost exceeds $100,000 at any point during the year) is designed to support the Canada Revenue Agency’s compliance and enforcement work “by ensuring greater transparency with respect to the foreign investments of Canadians.”

“Information reporting on foreign investments is a key tool for tax administrations around the world to support compliance with domestic tax obligations. While these requirements impose reporting obligations on taxpayers, their purpose is to support the integrity of Canada’s tax system,” she said.

That’s consistent with the justification for their introduction nearly three decades ago.

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Mike Dolson, a Toronto-based partner in McCarthy Tétrault’s National Tax Group, said the reporting requirements were brought in after an Auditor-General’s complaint that not enough was being done to track foreign assets.

They were also pretty unpopular from the start. “Not since the storming of the Bastille in 18th-century France has there been such a ruckus,” began a November, 1996, Globe and Mail column on the topic.

A lot has changed in the Canadian investment world since the 1990s. It’s easier for an ordinary Canadian investor to buy U.S. stocks, and easier to breach the $100,000 minimum reporting threshold. The requirement remains about as popular as Marie Antoinette in 1789.

To recap some of the main points, foreign shares and Canadian depositary receipts count toward your foreign specified property if they’re held in a non-registered account, but you don’t need to worry if you hold them through a Canadian-listed mutual or exchange-traded fund. Shares of Canadian-domiciled companies listed on U.S. exchanges are similarly exempt. And the reporting threshold applies to the cost of the property, not its market value.

Mr. Dolson said it’s important to keep in mind what information the CRA gets automatically. The Common Reporting Standard, which came into effect at the beginning of 2017, means Canadian financial institutions need to identify accounts held by residents of foreign tax jurisdictions, but this requirement doesn’t apply to Canadian resident individuals.

“What the T1135 is providing to the CRA is unique information in the sense that they’re not getting that information through other means automatically,” Mr. Dolson said.

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Among other things, the CRA could use information gleaned from T1135 forms to create a baseline for predicting income from foreign assets, or for finding people with significant foreign asset holdings that don’t match with their income, he said.

But Mr. Dolson acknowledged your complaint about the questionable usefulness of the requirement in the specific context of brokerage accounts held by Canadian residents.

“It will do absolutely nothing to directly tackle any kind of tax evasion,” he said, noting that trying to somehow dodge taxes by not reporting foreign shares held in a Canadian brokerage would be “phenomenally stupid.”

Tax evaders aren’t likely to file a T1135, but the very existence of the requirement gives the CRA a “penalty hammer,” he said. For serious transgressions, the fines can be up to 5 per cent of the cost of the property.

Mr. Dolson said the erosion by inflation of the $100,000 threshold means the requirement is now catching “people who you’re probably not going to find very interesting.” The good news is there may be room for change.

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For instance, Mr. Dolson said, there is “always discussion around whether we should be simplifying the forms.” The current T1135, which allows people with assets under $250,000 to file a simplified report, came about after strong opposition to its more detailed predecessor.

While Mr. Dolson isn’t aware of anyone making submissions to repeal the T1135 requirement, he said it’s hard to think of principled objections to certain changes, such as exempting foreign shares held in Canadian brokerages.

Is the Department of Finance considering an overhaul?

“The Government of Canada reviews the tax system on an ongoing basis to make sure that it remains competitive, fair, transparent and fiscally responsible. That said, it would be inappropriate for the Department to speculate on any potential or prospective changes,” Ms. Faucher said.

E-mail your questions to agalbraith@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.