Possible Pitfalls Arising Due to Foreign Fund Transfers into Canada
by Filomena Silveira
When not properly reported, the CRA views money coming into Canada from any other country as income. You may have moved to Canada from your home country recently or you may not have ever visited your country of origin. However, any substantial income arising from a foreign destination coming into Canada is subject to CRA scrutiny. It is in your best interest to seek professional help and report this income.
Transfer of Funds from a Foreign Country into Canada
You need to be aware of the fact that any foreign transfers over $10K brought into Canada immediately attract the attention of the CRA because the financial institutions involved in such transactions are responsible to report such deposits to the CRA. For that reason, this foreign income has the potential to be reviewed by the CRA. Once the CRA is aware of such significant foreign transfers into Canada, they will initiate a personal audit and cross-check the taxpayer’s bank accounts for assessment.
Importance of Documentation for Foreign Transfers
Any transfer of over $10K into Canada without proper documentation will be treated as foreign income. You will need to ensure that you keep the necessary documentation safely because the CRA can audit previous years’ records too once your case is being audited. Tax payers can reduce complications if they keep proper documentation for any transfers coming into the country and thereby prevent further problems.
How to Treat Substantial Income Generated in Foreign Country for Tax Purposes?
Any income generated in a foreign country, whether it is interest earned on cash, investments or rental income, it is the taxpayer’s responsibility to declare this income while filing for taxes in Canada. As a Canadian “Resident”, which is what determines your eligibility to file for such taxes, it is a must to file worldwide income within their personal income tax in Canada.
Worried About Foreign Income that is NOT Disclosed by You?
Governments across the world are increasingly becoming more and more integrated to counter tax irregularities. For that reason, governments report to each other income for non-resident tax payers to countries where such tax payers are residents. It is not exactly known how the governments coordinate on this issue but we have had cases of government sending letters to tax payers to pay taxes on non-declared pensions and profits on properties sold out of Canada.
The CRA can discover foreign income even if you do not disclose it. For that reason, it is in your best interest to report such income voluntarily. It is important to know that when you do a voluntary disclosure of such income claiming ignorance of the law or such, you may be able to minimize your liability. You will also need to report other income such as rent and interest. Some countries withhold taxes on interest and pensions but might not do so for the sale of property.
The process of voluntary disclosure is complex and seeking professional help will you to understand all your options in a much better manner.
Foreign Property Held by a Canadian Taxpayer
Taxpayers don’t have to declare property owned and held in a foreign country if in total the foreign property held is less than $100K at cost. If you hold property that is over $100K at cost, this property needs to be specified and declared in a separate tax return annually.
Specified foreign property includes:
– Bank accounts held abroad
– Debt securities and shares of foreign corporations held directly or indirectly through your Canadian broker
– Real estate
– Other tangible and intangible properties located outside Canada
It does not include:
– Properties used or held exclusively in the course of carrying on an active business
– Registered pension fund investments.
– Foreign investment held in Canadian-registered mutual funds
– Shares of a foreign affiliate (in this case other forms need to be completed)
– Avoiding Pitfalls Arising Due to Foreign Transfers
While the above-mentioned pitfalls are common, they can easily be avoided if you seek professional help. Each case involving such transfers is different and complicated. Hence, there is no general one-size-fits-all approach. Many times, when people do not understand such complexities, they think that such matters are not important, when, in fact, these matters require immediate attention to avoid strict action by the CRA.
We have had clients who performed regular bank transfers back and forth between Canada and other foreign countries and are now being assessed for up to $260-400K in tax payable because the CRA is assessing all the transfers coming into the country as foreign income. In such cases, we need to prove which transfer is not income. However, proving this can be a real struggle, especially if the clients do not keep proper documentation. Therefore, timely advice on such matters can simplify issues and address the problem before it increases your liability.
