Foreign Income Reporting: T1135 & Foreign Tax Credits

Types of Foreign Income to Report

• Employment income: Wages from foreign employers
• Investment income: Interest, dividends from foreign investments
• Rental income: Income from foreign rental properties
• Pension income: Foreign pensions (US Social Security, etc.)
• Capital gains: Profits from selling foreign assets
• Business income: Self-employment income from foreign sources

Form T1135: Foreign Income Verification Statement

You must file T1135 if you own specified foreign property with a total cost of more than $100,000 CAD at any time during the year.

What Counts as "Specified Foreign Property"?

• Foreign bank accounts
• Shares in foreign corporations (not in RRSP/TFSA)
• Foreign bonds and debentures
• Foreign rental properties
• Interests in foreign trusts
• Precious metals, gold certificates held abroad

What Doesn't Count?

• Personal-use property (vacation home you don't rent)
• Foreign property held inside RRSP, TFSA, RESP
• Shares in Canadian mutual funds that hold foreign investments
• Canadian ETFs that hold foreign stocks
• Foreign property used in an active business

T1135 Reporting Requirements

There are two reporting methods depending on the cost of your foreign property:

Simplified Method ($100,001 - $250,000)

• Check boxes for types of property owned
• Report total income from all specified foreign property
• Less detailed than the detailed method

Detailed Method (Over $250,000)

• Report each property individually
• Include country, cost, income, and gain/loss
• More extensive documentation required

Foreign Tax Credit

If you paid tax to a foreign country on income that's also taxable in Canada, you can claim a foreign tax credit to avoid double taxation.

How It Works

1. Report the gross foreign income in Canadian dollars
2. Calculate Canadian tax on that income
3. Claim credit for foreign taxes paid (up to the Canadian tax on that income)

Limitations

• The credit cannot exceed the Canadian tax on the foreign income
• Calculated separately for business income vs. non-business income
• Unused credits can be carried back 3 years or forward 10 years

US-Specific Rules

US Social Security

Under the Canada-US tax treaty, you only pay tax to your country of residence. Report on Line 11500 but claim a deduction for 15% on Line 25600.

US Dividends

• US companies typically withhold 15% (treaty rate)
• Report gross dividend on Line 12100
• Claim foreign tax credit for US tax withheld

US Rental Property

• Report income and expenses in CAD on T776
• May need to file US tax return
• Claim foreign tax credit for US tax paid

Currency Conversion

Convert foreign income to CAD using:

• Income: Exchange rate on the day received, OR
• Annual average: Bank of Canada annual average rate (acceptable for consistency)
• Capital gains: Rate on acquisition date and disposition date

Penalties for Non-Compliance

Failing to file T1135 or report foreign income can result in:

• T1135 late filing: $25/day, minimum $100, maximum $2,500
• Gross negligence: $500/month, up to $12,000 for 24 months
• Unreported income: 50% penalty on tax evaded

Voluntary Disclosure Program

If you haven't reported foreign income in past years, consider CRA's Voluntary Disclosure Program to potentially reduce penalties and avoid prosecution.

Key Takeaways

• Canadian residents must report worldwide income
• File T1135 if foreign property cost exceeds $100,000
• Claim foreign tax credits to avoid double taxation
• Canadian mutual funds/ETFs don't count as foreign property for T1135
• Keep detailed records of foreign income and taxes paid
• Consider the Voluntary Disclosure Program for past non-compliance