All Canadian residents are taxed on world income, not only on income from Canadian sources. Accordingly, Canadian taxpayers must declare all their foreign income, including investment income from funds held outside Canada, rental income from property they own abroad, foreign capital gains and losses, and so forth.
Canadian taxpayers are also required to disclose all their foreign property whose total cost amount is greater than $100,000. The form Foreign Income Verification Statement (T1135) is used to make this disclosure and must be filed within the same time frame as the income tax return.
In the event of audit by tax authorities, failure to meet either of these obligations can result in considerable penalties. In addition to having to remit unpaid income tax plus the appropriate interest, a variety of more severe penalties may apply. There can be penalties representing up to 50% of the amount of income tax owing, as well as high penalties for failing to file the T1135. The government may also take legal action for tax evasion if circumstances warrant.
Should you have unreported income or foreign property, you might consider using the voluntary disclosure programs (VDPs) offered by the Canada Revenue Agency and Revenu Québec. These programs could help you to rectify your situation providing you meet all the applicable conditions. VDPs allow taxpayers to make voluntary and unsolicited disclosure of errors or omissions to tax authorities. Taxpayers wishing to do so must submit a request by completing the appropriate forms and providing the required information.
Following the voluntary disclosure, taxpayers are nonetheless required to remit any income tax owing along with the applicable interest. However, the advantage of VDPs is that tax authorities may waive significant penalties as well as prosecution.
Note that VDPs may be used in situations other than those pertaining to income and foreign property. For instance, a taxpayer who has forgotten to report any other type of taxable income or to remit source deductions or who has failed to report GST or QST may file a voluntary disclosure.
Should you have any questions in this regard, or if you think that you need to file a voluntary disclosure, please contact your FBL expert.