Overview – T1135 Reporting Requirement: Exception for Interests in Non-Resident Trusts Not Acquired for Consideration
Canadian who own specified foreign property with a combined cost amount of at least $100,000 in a tax year is required to file a T1135 information return with his or her tax return which provides information about their foreign specified property. The definition of specified foreign property is quite wide, however there are some exceptions, including interests in non-resident trusts that were not acquired for consideration.
T1135 Reporting Requirement – T1135 Reporting Requirement: Exception for Interests in Non-Resident Trusts Not Acquired for Consideration
The T1135 reporting requirement only applies to specified Canadian entities, which is actually a very broad definition. Any taxpayer resident in Canada for a tax year is a specified Canadian entity. Partnerships for whom the share of profits or losses allocated to all non-resident partners is less than 90% are also specified Canadian entities. There are some specific types of taxpayers resident in Canada that are excluded from the definition of specified Canadian entity, including: mutual fund corporations, non-resident owned investment corporations, mutual fund trusts, persons or trusts exempt from income tax, and registered investments. Similarly, a partnership where every partner is a Canadian resident taxpayer excluded from the definition of specified Canadian entity is also not a specified Canadian entity. A trust resident in Canada where each beneficiary is a Canadian resident taxpayer excluded from the definition of specified Canadian entity is also not a specified Canadian entity.
A specified Canadian entity only needs to file a T1135 information return for a taxation year if the cost of amount to the entity of its specified foreign property exceeded $100,000 at any point in the year. The cost amount of a specified foreign property is at first instance how much the entity paid for that property and may be subject to adjustments based on the type of property and the entities’ circumstances. The reporting threshold is not based on the current fair market value of the specified foreign property.
The Canadian Income Tax Act defines “specified foreign property” to include:
(a) funds or intangible property, or for civil law incorporeal property, situated, deposited or held outside Canada,
(b) tangible property, or for civil law corporeal property, situated outside Canada,
(c) a share of the capital stock of a non-resident corporation,
(d) an interest in a non-resident trust,
(e) an interest in a partnership that owns or holds specified foreign property,
(f) an interest in, or right with respect to, an entity that is non-resident,
(g) indebtedness owed by a non-resident person,
(h) an interest in, or for civil law a right in, or a right — under a contract in equity or otherwise either immediately or in the future and either absolutely or contingently — to, any property (other than any property owned by a corporation or trust that is not the person) that is specified foreign property, and
(i) property that, under the terms or conditions thereof or any agreement relating thereto, is convertible into, is exchangeable for or confers a right to acquire, property that is specified foreign property.
Notably, this means foreign bank accounts, interests in foreign corporations, partnerships, and trusts are at first instance included in the definition of specified foreign property. There are however exceptions carved out from the definition of specified foreign property which exclude some property that would otherwise be included in the above list.
Exception For Interests in Non-Resident Trusts Not Acquired For Consideration – T1135 Reporting Requirement: Exception for Interests in Non-Resident Trusts Not Acquired for Consideration
The Canadian Income Tax Act excludes interests in non-resident trusts that were acquired that were not acquired for consideration by either the entity with the interest in the non-resident trust or a person or partnership which is related to the entity. In this context consideration means payment or some other benefit provided specifically in exchange for the interest in the non-resident trust. As a result of this exception many inheritances or gifts that involve a non-resident trust do not contribute towards a Canadian individual’s specified foreign property. A typical example could be a Canadian individual with non-resident parents or grandparents who create a trust for him or her in their will.
This exemption may apply to interests which are not obviously non-resident trusts. Many countries have entities or relationships in their legal systems that do not exist in the Canadian legal system. In such cases, the Canadian tax system considers their attributes within their foreign legal context, and then looks at how those attributes match entities or relationships within the Canadian legal system to find the closest correspondence in the context of whatever legal question is under consideration. In some cases, this means foreign legal entities or relationships which are not called trusts under foreign domestic law will be considered to be trusts for Canadian tax law purposes, including for determining what is specified foreign property.
For example, Lichtenstein’s legal system includes foundations which are similar to Canadian trusts, but have some attributes (such as separate legal personality) that are more similar to Canadian corporations. So far, the Canada Revenue Agency has consistently considered Lichtenstein foundations to be trusts for the purposes of Canadian income tax law. Classifying foreign entities for Canadian tax purposes is complex and requires assistance from expert Toronto tax lawyers.
Pro Tax Tips – T1135 Reporting Requirement: Exception for Interests in Non-Resident Trusts Not Acquired for Consideration
If you did have an obligation to file form T1135 and failed to do so, CRA will impose substantial penalties. If the Canada Revenue Agency has not yet contacted you regarding your unfiled T1135s, we recommend consulting with a qualified Canadian tax lawyer regarding submitting a voluntary disclosure application. A successful tax amnesty application will eliminate the penalties for failing to file form T1135. There is an exemption from filing form T1135 for the year an individual becomes a Canadian tax resident. When a contribution or loan is made to non-resident trust or a distribution is received by it, there may be a requirement to file other information returns separate from form T1135.
Canada has a complex regime which deems some non-resident trusts to be resident in Canada for some purposes including paying Canadian income tax. If you are the beneficiary of a non-resident trust or have contributed to one, you should consult with one of our top Toronto tax lawyers regarding whether the deemed resident trust rules apply to your trust.