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Canadian Perspectives - September 1998

The information in this edition of Canadian Perspectives is prepared for general interest only. Every effort has been made to ensure that the contents are accurate as of September, 1998 but professional advice should always be obtained before acting on the information herein.

Foreign Reporting Rules — Some Myths and Realities

By Grace Chow, CA, TEP
Cadesky and Associates LLP (Toronto)

Canada's new foreign reporting rules have been extremely controversial, and highly criticized. However, aside from the compliance burden that they represent, there is really no need to be overly concerned. This short article is designed to clear up some of the myths and misconceptions surrounding the rules.

Myth: Canada's new foreign reporting rules will now require foreign income to be reported.

Reality: The Canadian tax system has always required that foreign income be reported.

Myth: Completing the foreign reporting forms will lead to an audit.

Reality: Compliance with the law, and completion of the foreign reporting forms, will not necessarily lead to an audit. If your tax affairs are in order, then any questions raised by the Revenue authorities should be easy to deal with.

Myth: Shares in foreign companies need to be reported only if they cost over $100,000.

Reality: If the shareholdings in the foreign company represent 10% or more of any class of shares, then foreign reporting applies from 1996. The cost of the shares is not relevant for this purpose.

Myth: Foreign reporting is the first step to taxing Canadians based on their citizenship, like the U.S.

Reality: The U.S. tax system is fundamentally different to the Canadian tax system. To pay tax based on citizenship would require a complete overhaul of Canada's tax system, which is not likely to occur.

Myth: Offshore trusts cannot be set up now, due to the foreign reporting.

Reality: Offshore trusts are still the best tax planning method for immigrants to Canada, and the foreign reporting rules have no impact at all on tax planning with foreign trusts.

Revenue Canada has strong concerns that there are serious non-compliance problems in the foreign area. These do not just relate to immigrants; on the contrary, by far the greater concern is Canadians who have taken money offshore in arrangements of questionable validity.