Enhanced T1135 means more work for advisors

New form: Requires highest cost for each foreign property held.

Problems:

1. Clients can’t usually access the daily value of each security.
2. Clients can hold identical assets at different brokers. Clients will have to find out the value from each dealer, compare values for each security per day, and then report the highest amount.
3. Dealers don’t have the information. Keeping it on a daily, per-client basis is a data storage burden.

2. Geography

Old form: Required region where foreign property is located.

New form: Requires the country on a security-by-security basis.

Problems:

Clients may not be able to identify the country. And, even if they could, CRA needs to clarify how to treat the following:

• Supranational organizations’ securities, including those issued by the World Bank and European Investment Bank;
• Securities listed on multiple exchanges, since clients would not know how the dual listing affects the threshold;
• Securities whose ownership changed hands (Tim Hortons, for example, has bounced between Canadian and American ownership multiple times. A typical taxpayer may not know this because the place of incorporation isn’t displayed on monthly statements);
• Securities of Royal Dutch Shell, since “A” shares are listed on the London and Netherlands exchanges, but “B” shares are only available in London or via an NYSE ADR, with income that may be paid in British pounds or U.S. dollars for later conversion into Canadian dollars.

CRA understood it would be difficult to meet the new requirements, so for the 2013 tax year it offered relief. This allowed taxpayers to report total market value of foreign securities (provided securities were held with a registered Canadian dealer) rather than security-by-security, country, and highest-cost-in-the-year details.

In the June 2013 amended T1135 and February 2014 transitional rules, CRA also gave a pass to foreign income that showed up on a T3 or T5. In March of this year, Amsden sent the agency a letter suggesting the exemption should extend to the T5013 Statement of Partnership Income and T5008 Statement of Securities Transactions.

“The reason to exclude T5013s and T5008s (for full dispositions) is the same as that to exclude T3s and T5s,” Amsden said. “The income/loss or amounts allowing the calculation of capital gains/losses are reported to the CRA on Schedule 3 accompanying the taxpayer’s/investor’s tax return in the year of the disposition.”

But not only did CRA not give clients a break on the T5013 and T5008, they nixed the T3/T5 exclusion.

“The T3/T5 exemption would have reduced the number of securities taxpayers would be required to report on and the amount of information CRA would receive, key in for paper filers and review, as most securities would be dividend- and interest-paying where the client would receive a T3 or T5,” explains Amsden.

In that scenario, taxpayers and their accountants would:

1. exclude Canada-domiciled mutual funds (even if they hold foreign securities);
2. identify any remaining securities in non-registered accounts that did not earn income (no T3 or T5);
3. verify which of these were Canadian issues by checking www.sedar.com;
4. ask advisors to identify the country of issue of any of the remainder; and
5. find the highest month-end market value of each and report as required.

“This is not ideal,” Amsden adds, “but it would have simplified and reduced work for all parties.” Instead, while all Canada-
domiciled mutual funds and registered plan assets are still exempt, for the 2014 tax year and later, clients and advisors will need to wade through all individual securities—interest/dividend-paying or not—verify country of issue, and, for foreign-issued securities, determine highest month-end and year-end value.

Amsden adds that the aggregate reporting that CRA’s allowing for 2014 doesn’t ease the burden as much as some may think. “To aggregate the amount, [a client] actually has to have all of the raw, underlying data if [she’s] going to add across [her] different accounts with different broker-dealers.”

Bottom line: taxpayers still have to dig up, for each foreign security, the highest month-end and year-end market values, any related income or loss, and any gain or loss on disposition. Then, they must add together the values of the assets, net income and net gains to report each on a country-by-country basis. Amsden says the 2014 form puts dealers in an awkward position. “T1135 requirements are on individual taxpayers, not dealers. But it’s not that [dealers] don’t want to help; it’s getting the resources devoted to it. The priority goes first to [their own] regulatory requirements. They have breakdowns between Canadian and foreign income, but they’ve never had to provide breakdowns for individual countries.”

From a client-service perspective, it makes sense for dealers to give investors what they need to keep CRA happy.

But, with CRM2, dealers are already strained with time- and resource-intensive systems and other changes. Getting clients T1135 information means more systems upgrades, and that, says Amsden, “is like trying to turn the Queen Mary around.”

It was only in June that CRA announced the elimination of the T3/T5 exemption, but it takes between a year and 18 months, Amsden says, to make the systems changes necessary to accommodate additional reporting requirements.

Dim future for tax cheats

In February, G20 finance ministers endorsed the Common Reporting Standard for Automatic Exchange of Tax Information (CRS). The OECD’s 34 member countries, along with some non-members, have approved the body’s Declaration on Automatic Exchange of Information in Tax Matters. In July, the OECD released the Standard for Automatic Exchange of Financial Account Information in Tax Matters.

Barbara Amsden, the Investment Industry Association of Canada’s managing director, notes CRS requires participating governments to obtain detailed financial account information (including account balances, interest, dividends and sales proceeds) from their financial institutions and to transition to the annual and automatic exchange of specified data with other jurisdictions.

Currently, 65 countries have committed to CRS. More than 40—including lower- and higher tax-risk jurisdictions, such as the Cayman Islands—have pledged to have automatic information exchanges in 2017.

“Canada’s not one of CRS’s 40 early adopters,” notes Amsden, “[but] CRS should provide [us] with the ability to obtain certain information now, including which jurisdictions have legal and tax regimes that would permit masking of beneficiaries […] or other causes for concern CRA has identified.”