Foreign income, foreign tax and the T1135

If you’re a resident of Canada for tax purposes, you report your income from sources outside Canada as well as inside it. You may be able to claim a credit for foreign tax you’ve already paid, and if the specified foreign property you hold cost more than $100,000 in total at any time in the year, you also file Form T1135.

Residents report income from everywhere

Canadian residents report all their income, from sources inside and outside Canada. That includes people living abroad for a while who keep significant residential ties here (factual residents).

So foreign bank interest, dividends from foreign shares and other income from property abroad all go on your return, whatever your foreign property cost. The $100,000 threshold below only decides whether you file an extra form; it doesn’t exempt any income from tax.

Foreign dividends don’t qualify for the dividend tax credit. If you’re new to Canada, see your first tax return in Canada for how the year you arrive works.

Converting to Canadian dollars

Everything goes on your return in Canadian dollars, including the foreign tax you paid. In general, use the Bank of Canada exchange rate in effect on the day the amount arose. If you were paid at different times during the year, such as a monthly foreign pension, use the Bank of Canada’s average annual rate.

In certain situations the CRA accepts rates from other sources, such as Bloomberg, Thomson Reuters or OANDA, if they meet all of its conditions, including being verifiable and used consistently from year to year.

Claiming a credit for foreign tax

If you paid foreign income or profit tax on income you report on your Canadian return, you may be able to claim the foreign tax credit. You need to have been a resident of Canada at some time in the year.

• Report the full income. Don’t subtract the foreign tax from the income you report. You claim it as a credit instead.
• How much you can claim. In most cases, for each country, you claim whichever is less: the foreign income tax you actually paid, or the Canadian tax you’d otherwise owe on your net income from that country.
• Federal and provincial parts. Work out the federal credit on Form T2209 (it goes on line 40500), then the provincial or territorial credit on Form T2036 for your province’s Form 428. Quebec residents don’t use Form T2036; for Quebec’s foreign tax credit, see Revenu Québec.
• Tax treaties matter. A tax treaty between Canada and the other country can affect whether you can claim the credit. Income that a treaty makes non-taxable in Canada, and that you’ve deducted, stays out of the calculation.
• Keep proof. Keep your supporting documents, such as official receipts showing the foreign tax you paid. If you file on paper, attach Form T2209, those receipts and a note explaining your calculations.

When you must file Form T1135

Form T1135, the Foreign Income Verification Statement, identifies your foreign property; it doesn’t calculate tax. You must file it if you’re a Canadian resident and the total cost of your specified foreign property was more than $100,000 at any time in the year.

• It’s cost, not market value. The test uses the cost amount, which is generally the adjusted cost base. For property you received as a gift or inheritance, the cost is its fair market value when you received it.
• It’s the total. Shares of a foreign corporation costing $75,000 and a U.S. bank account holding $35,000 add up to $110,000, so you’d have to file.
• At any time in the year. If you crossed the line during the year, you file, even if you sold everything before December 31.

Specified foreign property includes money in bank accounts outside Canada, shares of foreign corporations (even if your Canadian broker holds them), bonds and other debts owed by non-residents, foreign rental property, and precious metals held outside Canada, among other things.

It doesn’t include personal-use property, such as a vacation home you use mainly yourself, or property used only in an active business. Foreign investments inside an RRSP or TFSA don’t count, nor does a Canadian mutual fund that holds foreign investments.

Which part of the form. If your total cost stayed under $250,000 all year, you can use the simplified Part A, ticking the types of property you held. If it reached $250,000 or more at any time, you complete the detailed Part B.

When it’s due. Form T1135 is due on the same day as your return: April 30, or June 15 if you or your spouse or common-law partner carried on a business.

New residents. You don’t file it for the year you first became a resident. After that, use each property’s fair market value on the day you became a resident as its cost.

If you don’t file

Significant penalties can apply for filing Form T1135 late and for false statements or omissions on it. And if you also leave income from that property off your return, the CRA gets three extra years to reassess you. If you’ve missed filings, the CRA’s Voluntary Disclosures Program may be an option.

In short

• Residents report income from everywhere, in Canadian dollars.
• Report foreign income before foreign tax, then claim the foreign tax credit.
• File Form T1135 if your specified foreign property cost more than $100,000 in total at any time in the year.