Foreign property reporting required even if no tax return
A Canadian resident is required to file the Form T1135 for each taxation year in which the person owns foreign investment property with a total cost of over $100,000 at any time during the year. The requirement does not extend to personal property such as a foreign home that is not used for income-earning purposes.
Interestingly, and as confirmed in the recent Samson and Hillard case, the filing requirement applies even if you are not required to file an income tax return for the year (say, because you don’t owe any tax for the year). The taxpayers in that case were a husband and wife who each owned foreign investment property over the $100,000 threshold in the four taxation years at issue. They were not required to file income tax returns for those years owing to significant loss carryovers from their foreign and Canadian rental properties. Nonetheless, the Tax Court of Canada held that the T1135 filing requirement applied, and the penalties assessed by the CRA to the taxpayers for the failure to file was upheld.
The taxpayers argued that a “due diligence” exception should apply in their case because they were reasonable in their belief that the T1135 filing was not required because they were not required to file income tax returns. The Tax Court did not allow the exception. Basically, the Tax Court found that the taxpayers were relatively sophisticated investors who had significant dealings with income tax matters in the past, including correspondence from the CRA that indicated the filing requirement. Their appeal was dismissed.
Calculation of stock option benefit with us company shares
Under the employee stock option rules, an employment benefit arises when you exercise the option and acquire the underlying shares. Generally, the benefit equals the amount by which the value of the shares when you acquire them exceeds the amount paid by you to acquire them (the “exercise price” under the option). In many cases, you can deduct one-half of the benefit in computing your taxable income (so that the benefit is effectively taxed at the same rate as a capital gain). The benefit is normally included in income in the year of exercise (or in the year in which you sell the shares if they are shares in a Canadian-controlled private corporation).
In the recent Ferlaino case, the taxpayer was an employee of a Canadian subsidiary of a US parent corporation. The US parent granted him some stock options, which he subsequently exercised. Since the shares were denominated in US dollars, he had to convert the relevant amounts to Canadian dollars to report the benefit on his Canadian tax return.
The taxpayer computed the Canadian dollar value of the shares at the time he acquired them using the Canada-US exchange rate in effect at that time. The CRA agreed that this was appropriate. However, the taxpayer computed his Canadian cost of acquiring the shares using the Canada-US exchange rate in effect at the time the option was granted. The CRA re-assessed the taxpayer, arguing that the appropriate method was to use the exchange rate in effect at the time the taxpayer acquired the shares (which resulted in a greater stock option benefit).
On appeal, the Tax Court of Canada sided with the CRA. The Court reviewed the relevant rules in the Income Tax Act and concluded that the exchange rate in effect at the time the shares were acquired was the correct rate.
This letter summarizes recent tax developments and tax planning opportunities; however, we recommend that you consult with an expert before embarking on any of the suggestions contained in this letter, which are appropriate to your own specific requirements.