T1135 fling no required

Tax Topics
1

Taxpayer has investments listed in his TD WEALTH Non-Registered Account(s) Year-end Resource Package

Investment Descriptions:

  • ISA-TDB@4.30% PA /NL’FRAC
  • ISA-TDB@2.80% PA /NL
  • ISA-TDB@4.30% PA /NL’FRAC
  • ISA-US$@3.90%PA /NL
  • ISA-US$@4.90%PA /NL’FRAC

(all above $100,000 each)

Are these TD ISAs Specified Foreign Property?

My thoughts:

  • The TD Investment Savings Accounts (ISAs) are deposit products issued by a Canadian bank (TD) and held in Canada, even when denominated in U.S. dollars. Therefore, they do not count as “specified foreign property.”

Why These ISAs are Not Specified Foreign Property?

My thoughts:

  • They’re deposits with a Canadian bank.
  • The underlying issuer is TD Bank Group (a Canadian bank), not a non-resident entity.
  • Deposits, even in foreign currency, held at a Canadian bank are Canadian property, not “foreign property.”

I read the following article from a Canadian Financial Institution:

Article states “A foreign currency bank account held with a bank in Canada is not specified foreign property, such as a USD chequing or deposit account, nor would foreign cash held in a Canadian investment account. Only cash in offshore accounts is included in specified foreign property that needs to be reported.”

As a final measure I can request the broker summary for support.

Conclusion:

  • None of the investments are “specified foreign property” for T1135 purposes because they’re deposit accounts with a Canadian bank, no T1135 filing is required.

Does anyone see it differently?

2

I think they are not specified foreign property, if it is, the bank would probably prepare a T1135 statement for client for filing. One thing though, can be very tricky, is how the US dollars came from. I ran into couple very strange situations where client received money abroad from so call debt, which should be specified foreign property already on itself. And other got the US from currency exchange company through hedging,

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3

@jeffliu thank you for your reply. You make some great points.

4

Specified Foreign Property

Canadian taxpayer received inheritance. Funds were inherited from father, who was a Mexican citizen residing in Mexico at time of his passing. Funds were deposited and invested in a Canadian financial institution.

Question:

  • Whether these inherited funds would be considered specified foreign property, given that the source of the funds is foreign, but the investment itself is now domestic?

Since the father was a Mexican resident, the inheritance is considered foreign-sourced. However, once the funds are received, what matters is how and where they are held.

Specified Foreign Property [233.3(1)] includes:

  • Funds or investments held outside Canada

Once the inherited funds are deposited into a Canadian financial institution, they are no longer considered Specified Foreign Property.

Conclusion:

  • The funds are not considered Specified Foreign Property and do not need to be reported on Form T1135.

Do others see this differently?

Foreign Inheritance Tax in Canada

I read from the following article https://www.srjca.com/inheritance-tax-and-cross-border-rules/:

For Canadians inheriting from overseas, foreign inheritance tax in Canada can introduce additional layers of complexity. Some countries, like the United States, impose estate taxes on their citizens’ assets, even if these assets are inherited by foreign residents. Canada and the U.S. do not have a tax treaty addressing estate taxes, so Canadian beneficiaries may be subject to U.S. estate tax if inheriting from a U.S. resident.

How do cross-border inheritance tax rules work between Canada and other countries?
Cross-border inheritance tax rules depend on tax treaties and the tax laws of the country where the deceased resided. While Canada has no inheritance tax, other countries may tax Canadian beneficiaries on assets inherited from their residents.

Conclusion:

I think a good starting point would be to gather all the necessary facts from the client.

It may also be wise to refer them to a firm such as SRJ Chartered Professional Accountants (the authors of the article mentioned above), as they have the expertise required in this area. This will help ensure the client is fully tax compliant in both Canada and Mexico (regarding the Foreign Inheritance). Perhaps they can schedule a consultation with SRJ for further guidance.

Thoughts?

5

Not sure about you, I had seen a case, client received inheritance in UK, the funds would be held in trust first, or esate, with the recipient as beneficiary, until it’s finalized.

6

That same article I referenced previously (Inheritance Tax and Cross-Border Rules: What Canadians Need to Know) states:

  • The tax treatment will depend on the country where the inheritance originates. Some countries may also impose an inheritance tax, which is often payable before the assets are transferred to the Canadian heir.

So, there is a chance any foreign inheritance tax is already settled.

Next, I need to clarify whether the foreign funds received by the heir, before being invested in a Canadian financial institution, qualify as specified foreign property that must be reported on the T1135 form.

The following article seems to answer that question: Foreign inheritance tax implications

  • You would need to declare a foreign inheritance of property with a cost of $100,000 or more, on form T1135 (this also applies if the gift brings your cumulative foreign property to over $100,000).

This is outside my expertise and may require a tax specialist. The article’s author may be a suitable referral.

Thoughts?

7

Whether you have to report the inheritance of over $100,000 depends on what type of asset it is, not because it is an inheritance. If one inherits $105,000 in cash and it sits in a foreign bank account, you need to report it in category 1 because it is funds over $100,000 on deposit in a foreign bank account. If you inherit real property worth $500k you don’t need to report it if it is just personal use/vacation property. But you would have to report it in category 5 if there is rental income.

Have a look at the T1135 instructions: https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1135/t1135-23e.pdf

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8

I took a look at that thank you.

Ultimately, the key for T1135 reporting is whether the taxpayer had legal or beneficial ownership of specified foreign property outside Canada at any point, correct?

9

Interesting question. It doesn’t really say whether we have to differentiate between that. The only time it mentions “beneficial” is in the section “Do you have to file this form?” on page 4.

• a trust in which all of the persons beneficially interested are persons described above;

This link seems to say that it is based on beneficial ownership: T1135s, Beneficial Ownership of Property, and Chan v The Queen

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