UK’s individual saving accounts (ISA) are tax-efficient savings and investment accounts that are available to the residents of the UK. Resident can either use ISA to save cash or invest in stocks and shares.
They pay no income tax on the interest or dividends received from an ISA and there is no capital gain tax from any investment profits. It is essentially the UK version of Canada’s TFSA.
However, a Canadian tax resident should pay attention to the filing obligations to report these foreign assets because failure to do so can lead to unfavourable consequences.
T1135 Form – Foreign Income Verification
Canadian residents (individuals, corporations, trusts and partnerships) who holds specified foreign property costing more than $100,000 at any time of the year must file form T1135 when they file their tax returns.
The term specified foreign property is defined in subsection 233.3(1) of the Income Tax Act and typically includes funds, property or an interest in a partnership or trust, and UK’s ISA falls under this definition.
Therefore, if the cost of a Canadian resident’s ISA is above $100,000, he or she must file form T1135 annually. Failure to do so may result in a penalty of $25 for each day late up to a maximum of $2,500 per year.
Moreover, if a Canadian tax resident knowingly fails to file or under circumstances amounting to gross negligence, the penalty is $500 per month up to 24 months resulting in a maximum of $12,000.
In addition, if the Canada Revenue Agency (CRA) already issued a demand to file T1135 but the taxpayer knowingly fails to file or under circumstances amounting to gross negligence, the penalty is $1,000 per month for up to 24 months.
After that, the penalty changes to 5% of the cost of the specified foreign property, which means 5 years of non-filing may lead to a penalty of half the cost of the property.
UK’s Individual Savings Accounts Voluntary Disclosure
Luckily, the voluntary disclosure program (the “VDP”) is designed to allow taxpayers to correct their previous errors on a tax return or disclose unreported income.
If a VDP application is accepted by the CRA, the taxpayer will have to pay the tax owing but he or she may be granted interest and penalty relief in exchange and there is no criminal prosecution.
However, the CRA is not obligated to accept all VDP applications and generally, a taxpayer only has one chance to correct his error. Therefore, it is highly recommended to consult with an experienced Canadian tax lawyer to maximize your chance of success.
For a VDP to be accepted by the CRA, it must satisfy the following conditions:
- The application must be voluntary which means a taxpayer must initiate the process before the CRA contacts him for potential tax problems;
- The information provided by the application must be complete. Therefore, a taxpayer must disclose information related to all taxation years;
- It must involve the application or potential application of a penalty;
- It must include information that is at least one year past due. A taxpayer only needs to pay a late-filing fee if the tax return is less than a year due;
- It must include payment of the estimated tax owing.
UK’s Individual Savings Accounts Tax Tips
The VDP is designed as a second chance for a taxpayer to come clean in exchange for penalty and interest reliefs. There are 2 streams under the VDP program – general and limited program.
The general program is more favourable as it offers interest relief of 50% for the period other than the most recent 3 years of tax returns required to file while the limited program only offers gross negligence penalty relief but other penalties will still be imposed as applicable.
The general factors the CRA will consider with respect to whether a VDP application will fall under the general program or the limited program are the amount involved, the number of years of non-compliance and the sophistication of the taxpayer.
At Barrett Tax Law, we will go through every single condition and make sure your application falls under the general program and maximize your chance of being accepted. Feel free to contact our office to book a consultation to speak with an experienced tax lawyer.
Barrett Tax Law: 416-907-8429