Tax Tip[] Foreign Reporting

Expanded Reporting Requirement For Foreign Assets

“The penalty could apply on a per-item basis.”

Over the last few years, the U.S. has significantly increased compliance requirements and penalties for U.S. persons who have foreign (non-U.S.) assets. A “U.S. person” includes a U.S. citizen, Green Card Holder or U.S. resident.

The Hiring Incentives to Restore Employment (HIRE) Act signed into law by President Obama on March 18, 2010 has increased the compliance burden even further starting January 1, 2011.

For a number of years, United States taxpayers have been required, under the Bank Secrecy Act, to disclose whether they have a financial interest in, signature authority or other authority over non-U.S. financial accounts where the total value of those accounts exceeds USD 10,000 at any time during a calendar year. Such disclosure is made on Form TD F 90-22.1, “Report of Foreign Bank and Financial Accounts” or FBAR, which is due by the following June 30th.” This form is not part of the income tax return. It is filed separately with the Treasury Department in Detroit.

The HIRE Act introduces new provisions directly in the Internal Revenue Code which will require U.S. individuals with an interest in a “specified foreign financial asset” to attach a disclosure statement to their personal income tax return, where the total value of such assets exceeds USD 50,000.

Specified foreign financial assets are:

  1. any financial account maintained by a foreign financial institution (e.g., bank accounts, RRSP’s, RESP, TFSAs), and
     
  2. to the extent not held in an account at a financial institution;

    (a) stocks or securities issued by foreign persons (e.g. non-U.S. private company shares),

    (b) any other financial instrument or contract held for investment that is used by or has a counterparty that is not a U.S. person (e.g. GIC’s, Bonds, Term Deposits), and

    (c) any interest in a foreign entity (e.g. non –U.S. personal trusts).

This HIRE reporting is in addition to the FBAR requirements and could cover more items than the FBAR rules. For example, shares of a non-U.S. private corporation require disclosure under the HIRE rules but not under the FBAR rules.

The penalty for failing to make the required disclosure is a fixed amount of USD 10,000. Though the legislation is not clear, it appears the penalty could apply on a per-item basis. An additional penalty of USD 10,000 for each 30 days of failure to disclose (or fraction of such 30-day period) applies if the failure to disclose continues for more than 90 days after the IRS notifies the individual, by mail, of the failure to disclose (to a maximum of USD 50,000).

The IRS has been given the authority to issue regulations necessary to carry out the intent of these rules, (including exceptions for non-resident aliens and specified classes of assets and exceptions to avoid duplicative reporting requirements) but no guidelines have been issued yet.

In order to reduce the potential compliance burden posed by this additional filing requirement, U.S. individuals may want to consider consolidating accounts where appropriate.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Severe Penalties for Not Reporting Foreign Property

“Form T1135 includes a certificate of full disclosure to be signed by the taxpayer.”

The current T1 General tax return has a yes/no question:

“Did you own or hold foreign property at any time in 2009 with a total cost of more than CAN$100,000?”

Two particular points to note are “at any time in 2009” and “total cost.” The latter means that you have to report all foreign properties if their total cost exceeds $100,000 at any time in 2009.

If the answer is “yes,” Form T1135 – “Foreign Income Verification Statement” must be filed. The form requires categorization of each type of property and also includes a requirement to report the total income which was reported on the T1 return from the foreign property.

The explanations on the form are important. Highlighted below are some key points, but a careful review of the detailed explanations is essential.

Property that must be reported include:

  • funds in foreign bank accounts
  • shares of Canadian corporations on deposit with a foreign broker
  • shares of non-resident corporations, wherever held
  • foreign rental property 
  • interests in foreign mutual funds
  • an interest in a non-resident entity

and a number of other items.

Specific exclusions from reporting are listed. The most important are personal-use property, an interest in a foreign affiliate and property used in an active business.

Form T1135 includes a certificate of full disclosure to be signed by the taxpayer, with the annotation “It is a serious offence to file a false statement.”

Very severe penalties are provided for failure to file the form, for making false statements, omissions, etc. They range from $25 per day, minimum $100, to a maximum of $2,400. In certain circumstances there is a further penalty of $500 per month, maximum $24,000. A total penalty of 5% of the unreported amounts may apply after 24 months.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.