Table of Contents
- Foreign Income Reporting and Verification – Introduction to the T1135
- Exemptions to Specified Foreign Property: What Does Not Need to Be Reported on the T1135
- A Beginner’s Guide to the T1135 Form: Simplified vs. Detailed Reporting
- Common Scenarios for Reporting Foreign Income on the T1135
- Checking, Verifying, and Reconciling Information on the T1 and T1135
- Some Good News on Detailed Method Reporting for Many Individuals
Foreign Income Reporting and Verification – Introduction to the T1135
When preparing Canadian tax returns, most taxpayers only need to report their Canadian income. However, if your client owns foreign property or earns income from outside Canada, there are additional reporting requirements that must be followed. This is where the T1135 – Foreign Income Verification Statement comes into play.
What is the T1135?
The T1135 is a disclosure form required by the Canada Revenue Agency (CRA) for taxpayers who own foreign property with a cost of more than $100,000 at any time during the year. It is important to note:
- The T1135 is not a tax form. It does not calculate taxes or create a tax liability.
- Its purpose is strictly disclosure – letting the CRA know what foreign assets you hold and the income they generate.
- Filing the T1135 is mandatory if the threshold is met, and penalties apply for late or missing filings ($25 per day, up to $2,500).
Why is the T1135 Important?
The CRA wants to ensure that foreign income is reported correctly on your tax return. Even though the T1135 itself does not calculate taxes, it serves as a cross-check for the CRA. If the income you report on your T1 return (such as rental income, dividends, or interest from foreign investments) does not match the information on your T1135, it can trigger audits or reviews.
Key Points to Know About the T1135
- Filing Requirement
- If a taxpayer owns foreign property with a cost over $100,000, they must file the T1135 with their personal tax return.
- Even if they earn no income from the property, the form must still be filed.
- Separate Transmission
- The T1135 is filed separately from the T1 return, even if you are e-filing.
- Filing the T1 and checking “foreign property over $100,000” does not automatically submit the T1135.
- What to Report
- Foreign property includes, but is not limited to:
- Bank accounts, stocks, bonds, and mutual funds held outside Canada
- Real estate (excluding personal-use property)
- Loans to foreign entities or individuals
- Do not include personal-use property, like a vacation home, unless it produces income.
- Foreign property includes, but is not limited to:
- Income Reporting
- The T1135 is for disclosure only. Any income generated by foreign property, such as rental income, interest, or dividends, must still be reported on the appropriate section of the T1 return (e.g., T776 for rental income).
- Ensure that the amounts reported on the T1135 match the income reported on the tax return. This reconciliation is key to avoiding issues with the CRA.
- Complexity
- For some taxpayers, the T1135 is straightforward. You simply list your foreign assets and the income they produced.
- For others with multiple foreign investments, the form can become tedious to complete. Proper record-keeping is essential.
- Penalties for Non-Compliance
- Failure to file, late filing, or inaccurate reporting can result in penalties.
- If a client has previously missed filing, the Voluntary Disclosures Program can sometimes be used to file late and have penalties waived.
Bottom Line for Tax Preparers
As a tax preparer, it’s crucial to:
- Ask clients if they have foreign property over $100,000.
- Ensure all foreign income is reported correctly on the T1 return.
- File the T1135 separately and double-check that the information aligns with the income reported on the tax return.
The T1135 is an important part of Canadian tax compliance. While it does not calculate taxes, it helps maintain transparency and avoids potential penalties for non-disclosure. Understanding how to identify when this form is required and how to reconcile it with the T1 return is an essential skill for any tax preparer.
Exemptions to Specified Foreign Property: What Does Not Need to Be Reported on the T1135
When learning about foreign property reporting for Canadian tax purposes, it’s important to understand that not all foreign property is considered specified foreign property. Some types of property are exempt from T1135 reporting, which can simplify things for taxpayers and tax preparers. Let’s break this down in simple terms.
1. Property Used Exclusively for an Active Business
- If the foreign property is used entirely for carrying on an active business, it is not reported on the T1135.
- Example: A Canadian company owns a manufacturing plant in the UK. Since this property is part of the company’s active operations, it does not need to be disclosed on the T1135.
- The reasoning: There are other reporting requirements for active business operations, so the government does not require this disclosure here.
2. Shares or Debt of a Foreign Affiliate (Corporations)
- Some shares or debts in foreign affiliates—which are corporations linked to a Canadian corporation—are exempt.
- Example: Canadian corporations with branch offices or subsidiaries abroad may hold these types of investments.
- Note: This is more relevant to corporate tax situations and is generally not applicable to personal tax clients.
3. Certain Interests in Foreign Trusts
- Interests in some foreign trusts are exempt, but these situations are rare and often complex.
- For most personal tax clients, this does not apply.
4. Personal-Use Property
- One of the most common exemptions for individuals is personal-use property.
- Example:
- A Canadian “snowbird” owns a condo in Florida or Arizona that they use only for vacations and personal enjoyment.
- As long as the property is not rented out or generating income, it does not need to be reported.
- This exemption often reassures taxpayers who own recreational properties abroad that they are not required to file a T1135 for those assets.
5. Canadian Mutual Funds Holding Foreign Property
- If a Canadian-managed mutual fund owns foreign assets over $100,000, individual investors do not report those foreign assets.
- Example: Even if a Canadian mutual fund invests in U.S. stocks or foreign bonds, you do not report that on the T1135.
- Why: The mutual fund itself handles foreign property reporting, simplifying the process for investors.
Important Notes on Reporting
- The $100,000 threshold applies to the total value of all specified foreign property combined, not each item individually.
- Example: If a client owns:
- A U.S. brokerage account with $90,000 in stocks, and
- A foreign bank account with $15,000,
- The combined total is $105,000 → T1135 must be filed.
- Example: If a client owns:
- Exemptions do not reduce the total value of reportable assets; only property that qualifies for exemption is ignored.
Summary
Understanding these exemptions makes T1135 reporting more manageable:
- Active business property → not reported.
- Certain foreign affiliate investments → generally not reported for personal tax clients.
- Personal-use property (e.g., vacation homes) → not reported.
- Canadian mutual funds holding foreign assets → not reported.
By knowing what is excluded, you can focus your attention on property that truly needs disclosure and ensure compliance without overcomplicating the T1135 process.
A Beginner’s Guide to the T1135 Form: Simplified vs. Detailed Reporting
When it comes to reporting foreign property to the Canada Revenue Agency (CRA), Form T1135, also called the Foreign Income Verification Statement, is the key form you need to know. This form helps the CRA track foreign property held by Canadians and ensures that all income from such property is properly reported on your tax return. Let’s break it down in simple terms.
Step 1: Determine if You Need to File
The first question you need to answer is:
Did you own or hold specified foreign property with a total cost of more than $100,000 CAD at any point in the year?
- If yes, you must file a T1135.
- If no, you do not need to file.
Remember, it’s the total value of all foreign property combined that counts toward the $100,000 threshold.
Step 2: Who Needs to File?
The T1135 is not just for individuals—it also applies to:
- Corporations
- Trusts
- Partnerships
However, in most beginner-level personal tax situations, you will be focusing on the individual taxpayer form.
Step 3: Reporting Methods
There are two ways to report foreign property on the T1135: the Simplified Method and the Detailed Method. Which one you use depends on the total value of your foreign property.
3.1 Simplified Method
- Eligibility: Total cost of specified foreign property is between $100,000 and $250,000 CAD.
- How it works: You simply list:
- The type of property (funds, shares, real estate, etc.)
- The country where the property is located
- Any income earned or capital gains realized from the property
Example:
- You have a U.S. bank account with $150,000 CAD.
- You earned $150 CAD in interest.
- Under the simplified method, you report:
- Property type: Funds held outside Canada
- Country: USA
- Income: $150 CAD
- That’s it! The simplified method is designed to make reporting easier when you have relatively modest amounts of foreign property.
3.2 Detailed Method
- Eligibility: Total cost of specified foreign property is over $250,000 CAD.
- How it works: You must provide detailed information for each asset:
- Maximum cost during the year
- Cost at the end of the year
- Income earned
- Capital gains or losses realized
Example:
- You have multiple U.S. and European bank accounts and a portfolio of foreign shares, totaling $500,000 CAD.
- For each property and security, you must report:
- Country of residence
- Maximum and year-end balances
- Any income (interest, dividends)
- Gains or losses from sales
The detailed method is more time-consuming because it requires collecting and reporting precise information for each individual asset.
Step 4: Income and Gains Reporting
Even though T1135 is a disclosure form and does not calculate taxes, you still report:
- Income from foreign property: Interest, dividends, rental income
- Capital gains or losses: From the sale of shares, real estate, or other foreign investments
All amounts reported on T1135 should match what you report on your T1 personal tax return.
Step 5: Key Points to Remember
- Separate Filing: The T1135 is filed separately from the T1 tax return, though it is submitted in the same tax year.
- Currency Conversion: Foreign amounts must be reported in Canadian dollars, using the appropriate exchange rate.
- Simplified vs. Detailed:
- Use simplified if total property is under $250,000 CAD.
- Use detailed if total property is over $250,000 CAD.
- Accuracy Matters: Make sure your T1135 matches your tax return. Any discrepancies can trigger CRA scrutiny.
Summary
The T1135 may seem intimidating at first, but it’s mainly a reporting tool, not a tax calculation form. For most newcomers:
- If your foreign property is under $250,000, the simplified method is easy and quick.
- If it’s over $250,000, the detailed method requires more work but follows the same basic reporting principles.
By understanding the form and the two reporting methods, you’ll be ready to help clients accurately disclose their foreign property and avoid costly penalties.
Common Scenarios for Reporting Foreign Income on the T1135
Filing the T1135 (Foreign Income Verification Statement) can seem complicated, but understanding real-world examples makes it much easier. Let’s explore some common scenarios you might encounter when helping clients—or even yourself—determine if and how foreign property should be reported.
Scenario 1: Canadian-Managed Mutual Funds
Example: Jason has a non-registered investment account with Canadian-managed mutual funds that invest in U.S. equities, totaling $127,000.
What to Know:
- Even though the funds invest in U.S. securities, they are Canadian-managed and held within a Canadian investment account.
- No T1135 reporting is required because the investor does not directly hold foreign property.
Key Takeaway: Only non-registered accounts and direct foreign property holdings count. Registered accounts like RRSPs, TFSAs, and RRIFs are exempt from T1135 reporting.
Scenario 2: Personal Use Property vs. Rental Property
Example: Mark and Deborah own a Florida condo purchased in 2011 for $310,000 USD.
- Personal Use Only:
- If they use the condo strictly for vacations and do not rent it out, they do not file a T1135.
- Rental Property:
- If the condo is rented for some months, generating income (e.g., $2,000/month), the T1135 must be filed.
- Each owner reports their proportional share (e.g., 50% ownership = $155,000 USD each) and converts the amounts to Canadian dollars.
- Rental income is reported separately on the T1 return, while the T1135 is purely a disclosure form.
Key Takeaway: The use of the property matters. Personal vacation use is exempt, but any income-generating use triggers reporting.
Scenario 3: Property Sold During the Year
Example: Amanda held Apple shares in her self-directed account with a cost of $98,000 USD (over $100,000 CAD), which she sold mid-year for $179,700 USD.
Important Rule:
- Even if Amanda no longer owns the property at year-end, she still must file the T1135.
- The CRA considers whether specified foreign property exceeded $100,000 CAD at any point during the year, not just on December 31.
Key Takeaway: Always check the highest value during the year, not just the year-end holdings.
Scenario 4: Multiple Small Foreign Holdings
Example: Terry has a small U.S. bank account in California with $5,000 USD and a rental property in Arizona purchased for $84,000 USD.
Important Calculation:
- Neither property individually exceeds $100,000 CAD.
- Combined total of all specified foreign property must be calculated.
- If the sum exceeds $100,000 CAD, the T1135 must be filed.
Key Takeaway: The $100,000 threshold applies to all foreign property combined, not individual assets. Always sum all holdings to determine filing requirements.
Practical Tips for Filing T1135
- Gather Complete Information: Ask clients for property cost, purchase dates, and any income earned.
- Currency Conversion: Convert all foreign amounts to Canadian dollars using the appropriate exchange rate.
- Err on the Side of Caution: If unsure, file the form. The penalty for not filing when required can be significant ($2,500 CAD or more).
- Document Everything: Keep detailed records for each foreign property, including personal use vs. income-producing status.
Summary
The T1135 is primarily a disclosure form, not a tax calculation tool. These scenarios highlight common situations that can catch newcomers off guard:
- Canadian-managed mutual funds and registered accounts are generally exempt.
- Any income-generating foreign property triggers reporting.
- Property sold during the year may still require filing.
- The total cost of all foreign holdings determines the $100,000 CAD threshold.
By understanding these scenarios, you’ll be better equipped to identify when the T1135 needs to be filed and help clients remain compliant with Canadian tax law.
Checking, Verifying, and Reconciling Information on the T1 and T1135
Once you’ve completed the T1135 (Foreign Income Verification Statement), your next step as a tax preparer is to make sure everything is accurate and consistent with what appears on the T1 General tax return. The T1135 is only a disclosure form, but the income shown on it must also be properly reported and taxed on the T1 return.
Let’s go step-by-step through how this reconciliation process works and what to look for.
1. Understanding the Relationship Between the T1135 and T1 Return
The T1135 form is designed to disclose two main types of information:
- Foreign income earned from specified foreign property.
- Capital gains or losses from the sale (disposition) of that foreign property.
However, the actual tax on this income is calculated and reported on the T1 return.
So, whenever you list any foreign income on the T1135, you must make sure that income appears somewhere on the T1 return — typically under:
- Interest and other investment income (T5 slip)
- Trust income (T3 slip)
- Rental income (T776 form)
- Capital gains (Schedule 3)
- Foreign business income
If the income is on the T1135 but not reflected on the T1, it means something was missed — and that can trigger CRA questions or reassessment.
2. Where the Numbers Come From
Foreign income information can come from several sources:
- Reports or summaries from the client’s financial advisor or investment institution.
- T3 and T5 slips that include income in foreign currency.
- Manual calculations for situations not covered by slips (for example, if someone loans money to a foreign individual and earns interest).
It’s your job to gather these details and confirm that the gross foreign income and capital gains shown on the T1135 match what is declared as income on the T1.
3. Identifying Foreign Income on T-Slips
When reviewing T3 or T5 slips, look for:
- Box 15 on the T5 slip: “Foreign income”
- Box 25 or 33 on the T3 slip: “Foreign income”
If the slips show amounts in U.S. dollars or another currency, they represent foreign-source income. You’ll need to:
- Convert those amounts to Canadian dollars (using the average annual exchange rate or the rate on the date of the transaction).
- Add them up to determine the total foreign income earned.
- Report that total on the T1135 in the section for “Gross income from specified foreign property.”
For example, if two investment slips show $1,875.20 and $2,486.20 in foreign income, you’d total them to $4,361.40 (after converting to CAD) and enter that on the T1135.
4. Reporting Foreign Capital Gains
Foreign capital gains aren’t limited to just the sale of shares or property listed on Schedule 3.
They may also come from mutual funds or investment trusts that distribute capital gains during the year.
For instance, if a U.S. mutual fund shows $4,230 in capital gains, that amount should also appear on the T1135 under “Gain (loss) on disposition.”
Remember: The T1135 shows what was earned, not what was taxed. The tax treatment happens on the T1, but the numbers between the two forms should align.
5. When Clients Have Large Portfolios
If a client’s foreign holdings exceed $250,000 CAD at any time during the year, they must complete Part B of the T1135.
This part requires a detailed listing of each security or property, including:
- The country it’s located in
- Maximum fair market value during the year
- Year-end fair market value
- Gross income and capital gains
This can be very time-consuming, especially if there are many securities and no summary from an advisor. In such cases, you may have to rely on:
- Year-end investment statements
- Market data (such as Globe and Mail or Yahoo Finance) to find maximum fair market values
- Transaction reports to identify income and gains
While tedious, it’s essential to ensure accuracy — incomplete T1135 filings can lead to penalties.
6. Worldwide Income and Consistency
Always remember that Canada taxes worldwide income.
That means:
- All income earned abroad must appear on the T1 return.
- The T1135 ensures transparency about where that income came from.
For example:
- If a client rents out a foreign property, complete a T776 form for rental income, just like you would for a Canadian property.
- If they earn business income abroad, disclose it under the appropriate section of the T1.
The CRA uses the T1135 to confirm that all income from specified foreign property has also been included on the main tax return.
7. Best Practices for Tax Preparers
To avoid mistakes and penalties:
✅ Cross-check the T1135 totals with all related slips (T3, T5, T776, Schedule 3).
✅ Verify conversions — all values should be in Canadian dollars.
✅ Include all sources of foreign income, even small ones.
✅ Document where each number came from — keep copies of slips, reports, and exchange rate sources.
✅ Double-check ownership values — remember the $100,000 threshold applies to total cost, not current market value.
In Summary
Reconciling the T1 and T1135 is one of the most important steps in accurate tax preparation.
The T1135 isn’t just a form to fill — it’s a way for CRA to confirm that foreign assets and income are properly disclosed and worldwide income has been taxed correctly.
As a beginner tax preparer, always remember:
- The T1135 tells the story of what foreign property a taxpayer owns.
- The T1 shows the tax impact of that story.
Ensuring both forms agree is what makes a tax return complete and compliant.
Some Good News on Detailed Method Reporting for Many Individuals
If you’ve learned about the T1135 Foreign Income Verification Statement, you already know how detailed and time-consuming it can be—especially for clients with several foreign investments. The detailed reporting method, required when the total cost of foreign property exceeds $250,000 CAD at any point during the year, can seem intimidating. The good news is that, in most cases today, financial institutions and advisors have made this process much easier.
💡 Why This Matters
When the T1135 reporting rules were first introduced, tax preparers had to spend hours collecting data for each investment: fair market values, income earned, capital gains or losses, and the countries where the investments were held. To make matters worse, clients didn’t always have easy access to this information. Fortunately, that’s no longer the case for most investors.
🏦 Financial Institutions Now Provide “Foreign Reporting Summaries”
Most major banks, investment firms, and financial advisors now provide clients with a year-end foreign income report. This report is a huge time-saver—it includes nearly all the information you need to complete the T1135 accurately.
Typically, these reports include:
- ✅ The country where each investment is held (e.g., U.S., U.K., France)
- ✅ Description of each security or investment (e.g., U.S. mutual fund, shares, bonds)
- ✅ Highest fair market value (FMV) during the year
- ✅ Year-end FMV (the value as of December 31st)
- ✅ Gross income distributions (dividends, interest, etc.)
- ✅ Realized capital gains or losses
With this information, the process becomes much simpler. Instead of searching through multiple T3 and T5 slips, or calculating values manually, you can use the summary directly to fill in the T1135.
🧾 When You Can Use the Simplified Method
If your client’s total foreign property was over $100,000 but never exceeded $250,000 during the year, you can use the simplified reporting method (Part A of the form).
In this case, you only need to:
- Indicate the type of property (for example, “Funds held in a brokerage account”).
- List the country (such as “USA”).
- Enter the total gross income from all foreign property.
- Enter the total capital gains or losses from all foreign property.
All of this information is available in the financial institution’s report, usually under “Income Distributions” and “Realized Gains/Losses.”
📋 When You Must Use the Detailed Method
If, at any point in the year, the total cost of the foreign property exceeded $250,000 CAD, you must use the detailed method (Part B of the form).
This means you’ll need to:
- Enter each security separately
- Specify its country
- Provide the maximum fair market value during the year
- Provide the year-end fair market value
- Record the income and capital gains or losses for each
This process can be very time-consuming if your client has many foreign securities. For example, someone with a large portfolio might have dozens—or even hundreds—of entries to report individually.
However, the good news is that modern financial systems often provide all these details in one consolidated report. You can go line by line through the report and transfer the numbers directly into the T1135 form.
⚠️ What About Self-Directed Investors?
Clients who manage their own investments through self-directed accounts (such as online trading platforms) may not receive a detailed foreign holdings report. In these cases, they’ll need to:
- Review their own trade records and year-end statements.
- Calculate the highest and year-end FMVs for each security.
- Determine the income and capital gains from foreign investments.
If they’re unable (or unwilling) to do this themselves, they may need to pay for additional bookkeeping time for you, the preparer, to organize the data.
🏁 Final Thoughts
While the T1135 can seem intimidating at first, most individuals no longer have to gather this information manually. Thanks to year-end foreign reporting summaries provided by financial institutions, preparing the T1135—especially under the simplified method—has become much faster and more accurate.
For new tax preparers, the key takeaway is this:
Always ask your clients if they received a foreign income or holdings report from their financial institution.
That one document can save hours of work and ensure your client’s foreign income is properly disclosed.
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