# T1135 and employee stock options



## beardless_bard (May 7, 2018)

I have a question about the form T1135 and employee stock options. I am given employee stock options which I have not yet excercised at strike price of 20 USD. If I have 5000 shares, do I need to file T1135? Is ACB in my case $100000 USD, or is it 0? I have been seeing mixed guidance online...

Thanks for the help in advance.


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## Jimmy (May 19, 2017)

beardless_bard said:


> I have a question about the form T1135 and employee stock options. I am given employee stock options which I have not yet excercised at strike price of 20 USD. If I have 5000 shares, do I need to file T1135? Is ACB in my case $100000 USD, or is it 0? I have been seeing mixed guidance online...
> 
> Thanks for the help in advance.


*T1135:* Your US holdings are ~ $100,000 CDn so you will have to file

There are 2 treatments of stock options , if the Co is a Canadian Private Co or not. Either way generally there are 2 tax consequences. 

*CCPC:* 1) You can defer taxes until when you actually sell the shares. If you hold the shares for 2 yrs and you deal at arm's length ( you aren't related to the co owners) You add the difference of the (FMV - strike price ) x the # of shares to your taxable income as a 'taxable benefit' . Then get a deduction of 50% of the amount. So the stock goes up to say $40 when you exercise the option , you would add (40-20) x the # of shares to income then get a deduction of 50% of that amount

2) Your ACB is $40. If you sell the shares later and the FMV increases then you will have a capital gain too.
*
Public co* Same but you add the taxable benefit when you exercise the option. 

http://www.taxplanningguide.ca/tax-planning-guide/section-1-businesses/the-taxation-stock-options/

https://www.canada.ca/content/dam/cra-arc/formspubs/pbg/t1135/t1135-17e.pdf


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## beardless_bard (May 7, 2018)

Thank you for the response, Jimmy. 

I understand how to calculate the ACB in case when options are excercised. However, I am not clear what is the value I am supposed to use for the purpose of reporting on T1135. 

The CRA website says:
9. Is the $100,000 threshold based on the fair market value of the property?
No, it is based on the cost amount. The cost amount is defined in subsection 248(1) of the Income Tax Act and generally is the adjusted cost base and not the fair market value.

Some of the resources that I could find mention that I should use the strike price * number of options. In my example, $20 * 5000 = 10000 USD. I am curious if the FMV has any effect here?

For example, what if I only have 2500 options vested to date, with strike price of $20. However, the FMV is $40. Should I file then?


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## Numbersman61 (Jan 26, 2015)

Here is a link to a CRA ruling
https://taxinterpretations.com/cra/severed-letters/2014-0529281e5
To be safe, I would report the stock options on the form 1135


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## gardner (Feb 13, 2014)

That interpretation is not very satisfying. If I have paid $100K for a lot of McDonalds shares, I will have to do a T1135 and if I hold some options in the company I work for, these are reportable on that T1135. Fine.

But this interpretation fails to answer if the options contribute to the $100K (or $250K) thresholds, and if so how. The stock options generally do not *cost* anything at all and even if you use the FMV-when-granted, that may not be enough to reach $100K since they may well have been out-of-the-money or at least worth a lot less at that time. If these options are the ONLY foreign holdings and the *cost* is below $100K, then my instinct is that a T1135 is not needed.

On the other hand, other than the hassle of doing it there is no apparent downside to filing even if you don't "need to". Maybe the safe thing is just to file one. The penalties for omitting are really severe


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## Numbersman61 (Jan 26, 2015)

gardner said:


> That interpretation is not very satisfying. If I have paid $100K for a lot of McDonalds shares, I will have to do a T1135 and if I hold some options in the company I work for, these are reportable on that T1135. Fine.
> 
> But this interpretation fails to answer if the options contribute to the $100K (or $250K) thresholds, and if so how. The stock options generally do not *cost* anything at all and even if you use the FMV-when-granted, that may not be enough to reach $100K since they may well have been out-of-the-money or at least worth a lot less at that time. If these options are the ONLY foreign holdings and the *cost* is below $100K, then my instinct is that a T1135 is not needed.
> 
> On the other hand, other than the hassle of doing it there is no apparent downside to filing even if you don't "need to". Maybe the safe thing is just to file one. The penalties for omitting are really severe


Exactly my feelings. When in doubt, report.


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## AltaRed (Jun 8, 2009)

Numbersman61 said:


> Exactly my feelings. When in doubt, report.


Times 3. Never mess with doubt on a matter such as this. Filling out the form is NOT onerous. Indeed, the OP likely has already spent more time trying to figure out whether to file, than it would take to completing the form.


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## kcowan (Jul 1, 2010)

AltaRed said:


> Times 3. Never mess with doubt on a matter such as this. Filling out the form is NOT onerous. Indeed, the OP likely has already spent more time trying to figure out whether to file, than it would take to completing the form.


I put together a spreadsheet for DW and for me back when it became an onerous effort. I just update that spreadsheet each year to refresh. Easy peasy!


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## Jimmy (May 19, 2017)

beardless_bard said:


> Thank you for the response, Jimmy.
> 
> I understand how to calculate the ACB in case when options are excercised. However, I am not clear what is the value I am supposed to use for the purpose of reporting on T1135.
> 
> ...


Like the others mention, I would report each year using an ACB = to the current FMV price. The FMV at the time of excercise will eventually be your ACB. It is not too onerous to complete and is just a form for the CRA records.


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## kcowan (Jul 1, 2010)

Yes try not to let the feeling of unfair persecution colour your interaction with CRA. They are simple innumerate clerks following government policy. Take you anger out on your elected politicians. We are small fish that just got caught in their dragnet.


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## beardless_bard (May 7, 2018)

Thank you for answers, everyone. Seems like no one really knows how to calculate the cost of options for the purpose of T1135, but it makes sense ti submit the form regardless. It is good to be on the safe side.


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## ian (Jun 18, 2016)

I worked for a large US multinational and was fortunate enough to be awarded stock options on a regular basis.

I always sold those options through the brokerage that held our company stock plan and option plan.

When I sold the options I really did not have to do any calculations. My employer T4 would list two numbers in two seperate boxes. One was the gross amount of the sale. The second was half of that. I entered the gross amount on one line of my return, entered the second number as a deduction from that number (as per CRA regs). Essentially they were taxed at the same rate as capital gains.


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## gardner (Feb 13, 2014)

ian said:


> I really did not have to do any calculations. My employer T4 would list two numbers


That is only for the income tax calculation, and is fine as far as it goes. But T1135 "Foreign Income Verification Statement" despite its name, has little to do with income. If you hold stock in your foreign multinational, or in some other foreign company or fund, have a read...

https://www.canada.ca/en/revenue-ag...ng/foreign-income-verification-statement.html

The penalties for failing to do this paperwork are onerous in the extreme -- $25/day fine.


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## AltaRed (Jun 8, 2009)

gardner said:


> That is only for the income tax calculation, and is fine as far as it goes. But T1135 "Foreign Income Verification Statement" despite its name, has little to do with income. If you hold stock in your foreign multinational, or in some other foreign company or fund, have a read...
> 
> https://www.canada.ca/en/revenue-ag...ng/foreign-income-verification-statement.html
> 
> The penalties for failing to do this paperwork are onerous in the extreme -- $25/day fine.


Agreed that stock options/RSUs have to be accounted for on the T1135.


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## kcowan (Jul 1, 2010)

I initially claimed my personal use condo in Mexico until they clarified that it was not required. Better to err on the side of full disclosure. It does not generate any tax obligations. Now only DW files one.


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## gardner (Feb 13, 2014)

kcowan said:


> try not to let the feeling of unfair persecution colour your interaction with CRA


It really is hard in the face of something like this T1135 thing. On the one hand is it basically irrelevant to the tax you might pay -- it is just a disclosure of foreign holdings without even any real information that would enable the CRA to track it down or verify it. The whole requirement to file it is obscure and not widely discussed or analyzed outside forums like this one, so the requirement to file it is easily missed even by otherwise diligent and honest taxpayers. They (somewhat) recently widened the net (2014 I think) to include holdings in Canadian FIs, which is preposterous, since they already have full reporting of that anyway. And despite the irrelevance of the information to actual tax collection, they set one of the most onerous penalties in all of tax policy upon it.



> clerks following government policy


This is a common fallacy. In fact the income tax act spells out very little and the CRA has a huge leeway to establish tax policy which winds up, in tax court, having the force of law, despite that no such law actually exists. The supreme court is the only place CRA policy is reconciled with the actual law and although the CRA has been shut down in many specific instances, in matters that are too small for the supreme court to take on, the CRA is a law unto themselves.


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## AltaRed (Jun 8, 2009)

The T1135 is likely meant to be a deterrent that can be used as leverage by the CRA against those with offshore tax havens. The threat of criminal prosecution may be enough to keep the rich onside. It is not unlike the policy my former (US multi-national) employer had on expense accounts. We did not have to submit receipts but if audited and caught cheating, the penalty could, and most likely would, be termination of employment. Every year or so, there would be a couple of cases showcased in the company mag of someone being investigated and terminated. It's enough to keep 99.9% of employees honest.


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## Eclectic12 (Oct 20, 2010)

gardner said:


> ... The whole requirement to file it is obscure and not widely discussed or analyzed outside forums like this one, so the requirement to file it is easily missed even by otherwise diligent and honest taxpayers ...


While I can agree it is confusing, particularly with changes made over the few years but I have seen many articles over the years on the topic.
http://business.financialpost.com/p...t1135-island-an-unpleasant-fate-for-taxpayers
https://www.theglobeandmail.com/glo...hen-you-file-your-tax-return/article34706718/
http://www.jamiegolombek.com/articledetail.php?article_id=1385
http://www.pressreader.com/canada/national-post-national-edition/20111011/286246686869315

It hardly seems obscure with so much written, never mind tax web sites and help included with tax software.
Either people are ignoring what is available or are assuming only those with off shore businesses or tax havens need to pay attention.




gardner said:


> ... This is a common fallacy ... *The supreme court is the only place CRA policy is reconciled with the actual law* and although the CRA has been shut down *in many specific instances, in matters that are too small for the supreme court to take on*, the CRA is a law unto themselves.


We are getting rid of fallacies here, right? :biggrin:

The Supreme Court deals with few tax cases *because there is a separate Tax Court* that was established in 1983 that has to render it's judgment first. 
Like other cases, the Supreme Court is the last court of appeal that decides whether the appeal of a particular Tax Court judgement has merit so that the appeal proceeds or is dismissed.

https://en.wikipedia.org/wiki/Tax_Court_of_Canada
http://cas-cdc-www02.cas-satj.gc.ca/portal/page/portal/tcc-cci_Eng/About

The key factor is whether the tax payer is willing to take CRA to the Tax Court, as at least two of my employers have done and won.
It has one process for $25K and under cases and another for over $25K so I don't see why anything but the will of the tax payer and/or their ability to convince a lawyer to represent them matters.

It has a long history of appeal boards or courts going back to 1917.
http://cas-cdc-www02.cas-satj.gc.ca/portal/page/portal/tcc-cci_Eng/About/Full_history


Based on the BC Superior Court judge that blasted CRA for being "high-handed, reprehensible and malicious" while awarding close to a $1 million between aggravated damages and legal fees, the Tax Court does not have to be the starting point either.
https://www.thestar.com/news/canada...enue-agency-for-ruining-bc-couples-lives.html


Cheers


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## kcowan (Jul 1, 2010)

I believe the T1135 is proof of an incompetent government. It might catch a few fish but the whales will be well-covered by lawyers. To some degree, I think it is demonstrating to many Canadians that their government is not here to serve them. That might be good. I remember our buddy Bylo Selhi being caught by merely being late in filing. WTF!

Having said that, I still prefer CRA to IRS. T1135 is a tiny example of what the IRS regularly does to its citizens.


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## gardner (Feb 13, 2014)

Eclectic12 said:


> The Supreme Court deals with few tax cases *because there is a separate Tax Court*


Yes. But the tax court basically accepts the CRA's policy as law. It is only an appeal to a superior court -- generally the supreme court -- where the actual income tax act -- that legislated law -- comes into direct effect. In an instance where the CRA policy is at odds with the law, the tax court will not necessarily help.



> the BC Superior Court judge


R. v. Samaroo was a criminal prosecution, not a tax action. The crown wanted to put them in jail. Thankfully the tax court and the CRA's policies only extend to money. The fact that the CRA got their *** handed to them (twice) shows how out of step the CRA's actions can be with the actual law. The subsequent Samaroo v. CRA judgement is a good read. If you haven't read, I recommend it. The Hon. Justice Punnett is an entertaining writer.

http://www.courts.gov.bc.ca/jdb-txt/sc/18/03/2018BCSC0324.htm


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## Eclectic12 (Oct 20, 2010)

gardner said:


> Yes. But the tax court basically accepts the CRA's policy as law. It is only an appeal to a superior court -- generally the supreme court -- where the actual income tax act -- that legislated law -- comes into direct effect. In an instance where the CRA policy is at odds with the law, the tax court will not necessarily help ...


Does the Tax Court take CRA policy as law?

Odd then it didn't run with CRA's interpretation of a payment to Henco Industries from the Ontario gov't as "net profit".
https://www.countertax.ca/blog/tax-court-decision-reminds-cra-litigation-cost/

Or that in this case, the taxpayer that won claimed that his income was exempt for taxation by virtue of paragraph 81(1)(a) of the Income Tax Act.
http://www.canadiantaxlitigation.co...ders-cra-to-pay-60-of-his-out-of-pocket-costs

Or that the third judgement on the list of recent judgements, Chao versus The Queen reverses CRA's decision to disallow employment expenses despite no T2200 form being filed as well as no clear single employer.

While not recent, according to this blog - self-represented appellants won 32% of the time and those represented by counsel won 41% of the time.
http://jltax.ca/2010/04/chances-of-winning-at-the-tax-court-of-canada/


Perhaps the best example that brings into question this POV is Bruce Douglas v. The Queen in 2012. 
(How's that for relevance to the thread?)

Douglas readily admitted he filed his T1135 form late with his late filed tax return. He had calculated a refund was coming so he assumed both could be filed late. As one would expect, CRA levied the late filing penalty which he successfully challenged in Tax Court. 

Odd that the Tax Court had both the Income Tax Act and CRA policy aligned to render a judgement of dismissal yet it decided that the tax payer's reasonable actions trumped the letter of the law.https://www.theglobeandmail.com/glo...e-to-fight-the-taxman-and-win/article4441442/


Cheers


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