Reporting Foreign Transactions and Investments
Foreign Reporting Requirements
Canadian taxpayers have been required to file reports for a few years now disclosing ownership of foreign property and providing extensive detail with respect to foreign affiliates and dealings with non-resident trusts. What has the CCRA learned from this information and in what ways has it proven useful? Are there any anticipated changes in the reporting requirements or forms?
The foreign reporting requirements (FRR) were introduced in 1995 and became effective for taxation years that begin after 1995 (after 1997 for the T1135). They are part of the Government’s strategy to address the issue of tax havens and to ensure that world income is properly reported and taxed.
The Government has set out several objectives for the reporting requirements. These objectives are:
- to alert residents to their obligation to pay tax on world income
- to combat tax evasion and the perception that the government cannot prevent it
- to combat the perception that wealthy Canadians can avoid tax by investing in tax havens
- to address the perceived tax bias in favour of foreign investments by ensuring that foreign-source income is taxed
- to deter future aggressive tax avoidance schemes by making offshore activities more visible to CCRA
- to subject offshore entities to CCRA’s scrutiny and ensure that the income is taxed
- to acquire more information to evaluate current income tax provisions.
The reporting rules apply to Canadian residents who:
- own an interest in a foreign affiliate (T1134)
- transfer or loan property to a foreign trust (T1141)
- receive a distribution from a foreign trust (T1142)
- own more than $100,000 of foreign investment property (T1135).
The Canada Custom and Revenue Agency (CCRA) has closely monitored the use of the information. A report on the first two years of the foreign reporting regime has been submitted to senior CCRA management.
The foreign reporting requirements have provided the CCRA with important information in relation to offshore trusts, foreign affiliates, foreign accrual property income and assets held outside Canada. Information contained on the foreign reporting forms enables the CCRA to scrutinize, more effectively, income reported from offshore investments held by Canadians, thereby improving the ability to preserve the integrity of the Canadian income tax base. This is particularly the case relating to use of tax havens by Canadians.
Promoting Voluntary Compliance
The release of the foreign reporting legislation, together with the public consultations and the study and report of the Auditor General, raised the public’s awareness of world income tax obligations. In addition, realization by taxpayers of the accessibility to tax authorities of offshore income information provided by the new reporting forms changed the risk determination of non-compliant behaviour.
CCRA international tax auditors have attested to the positive impact that these forms have had on voluntary compliance. The amount and timing of voluntary disclosures also provides evidence of how the new reporting requirements improved voluntary compliance. The level of voluntary disclosures that can be related to international issues has been significant since the introduction of the foreign reporting requirements.
Efficient use of the Foreign Reporting Information
All foreign reporting forms are forwarded to the Ottawa Technology Centre for processing. The T1135, T1141 and T1142 forms are data captured starting in June or July with the electronic version of the data being ready for distribution to all of our Tax Services Offices across Canada toward the end of December or January. The T1134 information is data captured as soon as the forms are received and is available live on-line in all Tax Services Offices across Canada as soon as the particular form has been data captured.
In the event that the hard copy of the return is required, we have established storage and retrieval processes in place.
More Efficient and Effective Enforcement Actions in the Field
Receiving full disclosure upfront in a timely and organized manner has given our international auditors a powerful new tool to identify high-risk files for audit. This has not only resulted in improved file selection, but as well, the ability to review a larger number of files than was previously possible. The new information is particularly useful in cases involving Foreign Accrual Property Income (FAPI) and in cases involving offshore trusts.
The new information has already led to discovery of systematic and well organized schemes designed to avoid taxes on foreign sourced income. This has enabled CCRA auditors to undertake a number of projects designed to uncover these schemes. Some examples are, unreported FAPI, offshore insurance schemes, investment business issues and charitable trusts.
As mentioned, CCRA auditors in the field have access to the foreign affiliate returns via an on-line database. This provides auditors with timely access to the information as it is processed and this information assists in the streamlining and planning of the audit.
More Effective Compliance Strategy
The analysis of the information contained on the forms in conjunction with analysis of ongoing audit reassessments has led to further improvements in targeting of high-risk files for audit. Moreover, this analysis will ultimately lead to prioritization of tax at risk in different foreign transactions, which will help develop an integrated compliance strategy to direct CCRA’s efforts in this area.
Quantitative analysis of reported data from all the forms is underway. Gaps in reported information will be identified through comparisons of reported information to outside statistical data (e.g., investment data from Industry Canada and Statistics Canada). This information will be supplemented at a later date by risk profiles to identify non-filers.
Anomalies and inconsistencies in reported information will be identified on an ongoing basis and provided to the field for appropriate action. Audit results and information provided by experienced auditors is being captured. This will be used to refine the risk assessment models.
Compliance with Foreign Reporting
CCRA has undertaken a number of compliance projects in order to identify taxpayers who may have failed to comply with their foreign reporting obligations. We have projects underway to identify non-compliance in regards to offshore trusts, foreign affiliates and investment assets outside of Canada.
Changes to the Forms
The CCRA consulted with taxpayers and tax professionals to obtain input on simplifying compliance, while maintaining the quality of information obtained. We have not received any recommendations for changes in regards to the T1135, T1141 or T1142. However, we have had a number of suggestions for changes to clarify and streamline the reporting of foreign affiliates (T1134). These changes have been fully reviewed and shared with the Department of Finance. In addition there may be substantial changes to the T1141 and/or T1142 following the enactment of the new offshore trust and foreign investment entity legislation.
The CCRA is open to the receipt of suggestions for improvement of any and all foreign reporting forms. You can be assured that we will share your information with the Department of Finance.