by Jeff KirshenWhat is a T1135 Tax Form: Foreign Income Verification
A T1135 Tax Form: Foreign Income Verification Statement reports all required foreign property owned by a Canadian resident taxpayer. If a taxpayer in Canada owns specified foreign property with a total cost of more than $100,000, they must fill out Form T1135, the Foreign Income Verification Statement in addition to their annual income tax return.
Presently, the T1135 Form has been redesigned to have the following two-tier information reporting structure for specific foreign property:
- Part A – Simplified Reporting method
- Part B – Detailed Reporting method
T1135: Do I Fill Out the Simplified or Detailed Reporting Method?
Taxpayers can fill out the Simplified Reporting method if they own specified foreign property which collectively costs $100,000, but less than $250,000 at any time of the year. Alternatively, if the foreign specified property is valued at more than $250,000, then the taxpayer must fill out the Detailed Reporting Method.
The distinguishing factor between the two forms is that the Simplified Reporting method allows the taxpayer to report the gross income from all specified foreign property they held during the year. For the Detailed Reporting Method, the taxpayer must provide the gross income from each type of foreign property. In other words, as the name says, the Detailed Reporting Method requires the taxpayer to give a more detailed response regarding the quantum and type of specified foreign property held. Categories in the Detailed Reporting method include:
- Funds held outside of Canada;
- Shares of non-resident corporations;
- Indebtedness owed by non-resident;
- Interests in non-resident trusts;
- Real property outside Canada;
- Other property outside Canada; and
- Property held in an account with a Canadian registered securities dealer or a Canadian trust company.
T1135: What is Specified Foreign Property?
When the term “foreign property” is used, rental property owned outside of Canada immediately comes to mind. However, the categories in the Foreign Reporting Method show that specified foreign property encapsulates a much broader term. For instance, a common mistake made by taxpayers is failing to realize that foreign stocks held in Canadian registered securities dealers must be reported. As such, if you invest in classic blue-chip stocks such as Apple, Disney, Microsoft or any other companies based in American stock exchanges, they must be reported (Over $100,000).
Regarding “specified foreign property” the term also includes but are not limited to the following:
- Foreign bank account balances;
- Shares of Canadian corporations on deposit with a foreign broker;
- Shares of foreign corporations;
- Foreign land and buildings;
- Interests in foreign mutual funds;
- Debts owed by non-residents and
- Interests or rights in specified foreign property.
T1135 Penalties
Failure to file T1135 forms can result in harsh penalties for the taxpayer. Specifically, taxpayers are charged a penalty of $25 per day for up to 100 days for failing to file the T1135 Form. The minimum penalty for failure to file is $100 and the maximum is capped at $2,500 per year. So if you have missed multiple years the penalty and interest amounts can be steep!
What if I have not Filed my T1135 Form?
Taxpayers who have not filed the T1135 form or otherwise have provided inadequate information can file a Voluntary Disclosure. The CRA encourages taxpayers who have provided incomplete information, omitted information, or who have not filled Form T1135 to come forward and correct their tax affairs through the program.
It is important to note that the period within which the CRA can reassess a taxpayer’s tax return is extended by three years if both of the following conditions have been satisfied:
- The taxpayer has failed to report income form a specified foreign property on their income tax return; and
- Form T1135 was not filed, was not filed on time, or was filed inaccurately.
Taxes involving foreign property always involve an added layer of complexity. If you have any questions about how to file a T1135 form or apply for a voluntary disclosure, call us today! We can help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenClaiming Capital Cost Allowance on a Rental Property
Capital Cost Allowance is a deductible expense (taken off your taxable income) for the depreciation (wear and tear) of something. More specifically, Capital cost allowance (CCA) is the depreciation of fixed assets, excluding land, that is allowed to be claimed as an income tax deduction. A portion of the expense is deductible each year CCA is claimed.
Taking CCA on depreciable rental property allows taxpayers to write off the capital cost of the property or interest in property over time. Generally, in the first year that the asset is acquired, only 50% of the applicable CCA rate is allowed. The asset is subsequently expensed on a declining basis at the applicable rate each year. However, for certain kinds of depreciable property, the 50% rule, or half-year rule, does not apply.
Depreciable properties are grouped by class, and a property of the same type may belong to a different class. Each class corresponds to its own rate for capital cost allowance.
CCA is calculated on a declining basis, based on the enumerated rate and the undepreciated cost of the property that year. For each year that CCA is claimed, the prior year claimed is subtracted from the capital cost of the property, until the property depreciates to zero or is disposed of or lost. The full available amount for CCA does not need to be claimed in full of each year– a lesser amount can be taken to save the balance of the entitled allowance for subsequent years to reduce income.
If the fiscal year is shorter than 365 days, the capital cost allowance is generally prorated for rental property.
Class 13 Property that is a Leasehold Interest
A leasehold interest is the interest of a tenant in any leased real property. Capital cost allowance can be claimed for leasehold interests that incur capital cost. A leasehold interest is not considered to be depreciable property unless there is a capital cost incurred in respect of that property. For instance, additions for the leased space paid for by the tenant is a capital cost; the leasehold interest is now considered depreciable property with the incurrence of the capital cost and provides a deductible amount under CCA. Common lease periods for real property range from five to 10 years.
The capital cost of a leasehold interest of rental property depends on the type of leasehold interest and the terms of the lease. For Class 13 property, the capital cost of a leasehold interest would include the amount that the tenant expends to improve the leased property that are capital in nature, such as the amount the tenant expends to obtain or extend a lease or sublease. If the tenant pays the landlord to permit the sublease of property, capital cost allowance may be claimed. However, amounts paid by a tenant to cancel a lease are not included in the capital cost allowance. The half-year rule does not apply for Class 13 Property.
For buildings on leased land, separate classes are applicable.
Class 1, 3, and 6 Rental Property
For owners of rental property, capital cost allowance would include the purchase price, associated legal fees, GST/HST or any provincial sales tax, and the cost of equipment and furniture associated with renting a building. Land itself is not depreciable property, but depreciable property on land, such as buildings, are included. Only the costs related to the depreciable property can be claimed under capital cost allowance. CCA can be claimed once the property becomes available for use or when it begins to earn income.
Furthermore, the sale of a rental property may result in the recapture of your claimed depreciation being added back into your income. Recaptured amounts occur when the proceeds from the sale of the property exceed the remaining undepreciated capital cost on the property. The total cost of the depreciable property in the class subtracted from the prior claimed allowance is the remaining undepreciated capital cost. When claiming CCA, the allowance lowers the taxpayer’s tax liability through lowing their taxable income, but upon the sale of the property, prior claimed CCA amounts are recaptured and taxable.
Consequences of Claiming Capital Cost Allowance
Given the upward trend of real estate, any depreciation taken may be included back into the taxpayer’s income upon a sale of the property. Any profit earned on rental property is treated as a capital gain and taxed at 50%. However, recaptured amounts are taxed at 100%. If there is no depreciable property left at the end of the year but there is still outstanding CCA that could be claimed, a deduction to your income may be allowed, known as a terminal loss.
When you sell a property, all of the CCA or depreciation previously used will be counted as regular income so it is extremely important to review your situation to determine whether claiming CCA is the right tax move. Here at Rosen Kirshen Tax Law, we would be happy to review your situation and determine the most efficient tax plan for you! Call us today!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenRevenue Canada Disputes
A Revenue Canada dispute is any disagreement that you have with the Canada Revenue Agency. These disputes can be about anything on your tax returns, such as credits, deductions, and income. Additionally, disputes can be about how to classify income and whether it should be counted as business income, or capital gains. There are many different types of Revenue Canada disputes, and here at Rosen Kirshen Tax Law, we can help with any dispute you have!
Revenue Canada Dispute – Notice of Assessment
Revenue Canada disputes usually arise upon receipt of a Notice of Assessment. Notices of Assessment notify taxpayers of the result of their tax filings and also indicate a refund or amount owing. Amounts reported in these Notices may differ from amounts reported in the taxpayer’s tax return which creates a situation where a taxpayer needs to dispute the Notice of Assessment.
Taxpayers have a right to dispute CRA assessments, and may do so by filing a notice of objection or loss determination. If you need more information before disputing a Revenue Canada assessment, there are several telephone numbers to contact depending on the nature of the inquiry. Please note that there is a deadline for a Revenue Canada dispute. Taxpayers may file a formal Notice of Objection within 90 days of receiving a Notice of Assessment. If 90 days have already passed, taxpayers may apply to the CRA for an extension of time to file their Notice of Objection. This application must outline reasons for why the Notice of Objection was not filed within the usual time limit. The time limit for this extension is one year after the 90 days has run out.
Revenue Canada Dispute – Appeals Division
After filing a Notice of Objection within the stipulated time period, the taxpayer will be contacted by the Appeals division of the Canada Revenue Agency. Typically, you will have an opportunity to present your argument to the appeals division before they respond. Once they have responded, you get one last chance to prove your point before a final decision is made. The final decision will either vacate, confirm, or further reassess the taxpayer’s Notice of Assessment. A vacation means that the CRA has entirely abandoned the Notice of Assessment in dispute and agree to go back to the taxpayer’s original position. A confirmation means that the CRA upholds the Notice of Assessment it issued, and a further reassessment means that the CRA has adjusted the Notice of Assessment in whole or in part.
Revenue Canada Dispute – Tax Court
If you still disagree with Revenue Canada after the Notice of Objection, Taxpayers may file a Notice of Appeal to Tax Court if they wish to further their Revenue Canada dispute. Appeals are heard at the Tax Court of Canada, which is an independent court of law that regularly conducts hearings in major centres across Canada.
The taxpayer may choose to have the appeal heard under either an informal procedure or general procedure. Smaller amounts are typically in dispute under the informal procedure, and there may not be strict adherence to all technical rules of evidence. Without choosing to hear the appeal under informal procedure, the appeal will be heard under general procedure. Under the general procedure, individuals may be self-represented and corporations must be represented by a lawyer.
Revenue Canada Dispute – Federal Court of Appeal and the Supreme Court of Canada
After the Tax Court renders its judgment, taxpayers may further appeal to the Federal Court of Appeal. These appeals are looked at based on whether there were errors in the original Tax Court hearing, which led to an incorrect result. If the taxpayer’s dispute involves issues of national significance, the taxpayer may apply for, and be granted, leave to further appeal to the Supreme Court of Canada. All judgments rendered by the Supreme Court of Canada are final.
If you are involved in a Revenue Canada dispute, or you disagree with the results of a Notice of Assessment you have received, call us today! We handle Revenue Canada disputes from audit all the way through the Federal Court of appeal. Make sure your Revenue Canada dispute is handled by a professional, we’re here to help!
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jeff KirshenI Owe Money to the CRA – What do I do?
So you filed a personal, corporation, or GST/HST return but you weren’t able to cover the balance owing to the Canada Revenue Agency (“CRA”). What now?
This is the same question faced by tens of thousands of Canadians everyday. You have options, but you also need to know what the CRA can do in order to collect the amount owing.
Payment Arrangements
If you cannot afford to pay off your back taxes, you can attempt to get yourself on a payment plan with CRA. CRA’s position is always that you should pay them off first, prior to any other creditor. It can be very difficult to negotiate a payment arrangement with someone who wants you to incur credit card interest at a rate of 20% just so your debt to them can be paid off faster.
Rosen Kirshen Tax Law specializes in tax dispute resolution, which includes negotiating payment plans with CRA collections officers. We know your rights and we also know the CRAs code of conduct, which we use to get you on a payment arrangement that suits your current financial abilities.
Call us today to discuss getting you on a payment arrangement so you no longer have to worry about legal action being taken against you.
What can the CRA do to me?
If you owe CRA, and you are not making payments, they will come after you, your family, and your business. They start by garnishing your wages, or receivables and freezing your bank account. They then take the money out of your account but they don’t release it! They continue to hold your bank account basically trying to make sure you can’t put food on the table, or keep the lights on.
If that isn’t enough, they can seize your assets, put a lien on your home / property, and eventually force the sale of your home / property.
Interests and Penalty
If you file a tax return late, you are immediately hit with penalties, and then interest on top of those penalties. A debt of $10,000 can easily balloon to $20,000 in a matter of minutes.
CRA continues to charge interest on your debt at a rate of 5% compounded daily. This works out to about 7.1% of interest being charged to you every year! CRA even charges interest on top of interest!
If you are in a situation that feels like you have no escape, you might want to look into the Taxpayer Relief Program, and you should give us a call today!
Taxpayer Relief Program
Taxpayers have the ability to apply for the removal of penalties and interest charged to them over the previous 10 years. CRA has strict guidelines about what type of scenario qualifies for taxpayer relief. If you are drowning in interest and penalties, you need to look into this program, and call us to get started!
Handling CRA debt can be extremely stressful for you, your business, and your family. Rosen Kirshen Tax Law takes over for you, so you no longer have to stress about how to deal with CRA collections. Call us today, and rest easy knowing your debt is in the right hands.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
by Jason RosenPrincipal Residence Exemption
The benefit of the principal residence exemption is obvious. As long as the sale qualifies, you will not pay tax on the profit you made from selling your principal residence.
When you normally sell a property, you are subject to tax on the gain from the sale. The gain is typically the difference between the price you paid, any improvements made, and the sale price. If the principal residence exemption applies to the sale, it would eliminate the capital gain and eliminate the need to report the sale on a tax return.
Taxpayers should keep in mind that the exemption may only remove a portion of the capital gain. If this is the case then the sale must be reported as there will be some taxes owing.
What is a Principal Residence?
A principal residence is a property where a taxpayer, his or her spouse or common-law partner, or any children live in at some point during the year. You do not have to live the majority of the year in the property to designate it as your principal residence.
An interesting tidbit is that a principal residence does not have to be located in Canada.
You and your spouse are only allowed to designate one property as your principal residence in any given tax year. If the property was owned prior to 1982, you and your spouse can designate separate properties as principal residences.
Half Hectare Rule
If your principal residence is more than ½ hectare (1.25 acres) of property, then the Canada Revenue Agency (CRA) has stated it will only allow the ½ hectare to be considered part of the principal residence. What this means is if your principal residence resides on property larger than ½ hectare, there would be a capital gain to report on the excess property once it has been sold.
There are situations where the CRA will allow more than a ½ hectare for a principal residence. Typically this is where the property cannot be subdivided. You should seek legal assistance if this situation applies to you.
Length of Ownership
If you have owned a property for more years then it has been your principal residence, you will have to report the sale on your tax return. Furthermore, there will be a calculation to complete to see how much principal residence exemption you are entitled to. What this means is that even though it has not always been your principal residence, you can calculate an amount that would not be included as a capital gain because the property has been your principal residence for a certain period of time.
The Formula
The principal residence exemption formula is as follows:
(# of years home is principal residence + 1) x capital gain
# of years home is owned
As you can see above the formula provides an extra year. This can be extremely beneficial when a taxpayer owns more than one property.
Example
Example of principal residence exemption:
- Taxpayer has owned their home for 20 years;
- It has been their principal residence for 14 years; and
- The capital gain before the exemption is $100,000.
The exemption amount is (14+1)/20 x $100,000 = $75,000. So $75,000 is tax-free, and the remaining $25,000 is a capital gain. The taxable capital gain is $12,500.
Cottages
When you own a cottage and a home for the same number of years, it can be very complicated knowing the best tax strategy for designating one, or the other as your principal residence in the year of sale.
This involves calculating the difference in tax amounts, and the values of the properties from the time of purchase to the time of sale.
Change in Use
Please see our article regarding change in use here.
If you have any questions regarding the Principal Residence Exemption, or are have been contacted by the Canada Revenue Agency regarding your usage of the exemption, give us a call today to see how we can help!
Income Tax Act
CRA Resources
What is a principal residence?
Designating a principal residence
Changes in the use of a principal residence
Sale of farm property that includes a principal residence
Principal residence and other real estate
Folio S1-F3-C2: Principal Residence
Folio S1-F3-C2: Principal Residence Outside Canada
T2091(IND)-WS, Principal Residence Worksheet
TI-001, Sale of a residence by an owner builder
Case Law
Voykin v. The Queen, 2004 TCC 658 – Adventure in the Nature of Trade
Freer v. The Queen, 2003 TCC 20 – Capital vs. Business Income
Giusti v. The Queen, 2011 TCC 62 – Condo Flipping
Detailed case law analysis may be found here.
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.