Does a Canadian have to report a US DST interest on Form T1135?

The $100,000 threshold is on cost, across everything you hold outside Canada

Section 233.3(1) defines a reporting entity as a person whose total cost amount of specified foreign property exceeds $100,000 at any time in the year while resident in Canada, and subsection (3) requires that entity to file a prescribed return by its filing-due date. The CRA's Form T1135 page names the filers as Canadian resident individuals, corporations and certain trusts, plus some partnerships.

The test is cost, not value, and it is cumulative. The CRA's T1135 questions and answers give the example of $75,000 of foreign shares and a $35,000 foreign bank account, which together cross the line, and confirm that meeting the threshold at any time in the year is enough even if the property was sold before year-end. A US rental bought for $400,000 has always put its owner over the threshold on its own.

A DST interest fits the definition two ways

Section 233.3(1) lists an interest in a non-resident trust in paragraph (d) of specified foreign property, excluding under paragraph (m) an interest that was not acquired for consideration. A 1031 exchange into a DST gives up real property for the interest, which is consideration. The CRA's list of categories on the T1135 page includes interests in non-resident trusts acquired for consideration.

Rev. Rul. 2004-86 holds that the Delaware statutory trust it describes is an investment trust classified as a trust for US federal tax purposes, and that a taxpayer may exchange real property for an interest in it under section 1031. How the CRA characterises the same interest, as a trust interest or as a direct interest in US real property, is a question for your Canadian adviser. It does not change the answer, because paragraph (b) of the definition separately covers tangible property situated outside Canada, with exclusions only for personal-use property under paragraph (p) and property used exclusively in an active business under paragraph (j).

The rental you exchanged was in that second category. The CRA's questions and answers say a condominium outside Canada rented out with a reasonable expectation of profit is specified foreign property that has to be reported, and that the definition includes property that produces no income.

What the exchange does to the cost amount you report

The US exchange carries your old basis into the DST interest for US purposes. Canada does not have that rule for a rental: as explained on whether a 1031 works for a Canadian owner, Canada treats the sale as a disposition in the year it happens, so the Canadian cost of the DST interest is what you gave for it, measured when you acquired it. That figure is the cost amount for the T1135 threshold and for Part B reporting.

In the year of the exchange you report both: the rental, for the part of the year you held it, and the DST interest from the date of acquisition. The detailed Part B method asks, for each property, for the country, the maximum cost during the year, the cost at year-end, the income or loss, and the gain or loss on disposition.

The threshold for the simplified Part A method is a total cost of less than $250,000 throughout the year, where you check a box for each type of property rather than listing each one. Most owners who have just exchanged a US rental are above that and use Part B.

Penalties: $25 a day, and far more for a knowing failure

Section 162(7) of the Income Tax Act sets the general penalty for failing to file an information return at the greater of $100 and $25 for each day the failure continues, up to 100 days, which is a $2,500 ceiling. The CRA's table of penalties confirms that figure for Form T1135.

Section 162(10) applies where the failure is knowing or grossly negligent: $500 a month for up to 24 months, a $12,000 maximum, less penalties already levied, and after a demand to file under section 233(1), $1,000 a month to a $24,000 maximum. The table adds the section 163(2.4) penalty for false statements or omissions, the greater of $24,000 or 5% of the cost of the property involved.

Those amounts are per return, so an owner who held a US rental for several years without filing faces them for each year. The US side has its own filing stack, Form 1040-NR with the trust's reporting to each owner, as described on DSTs for foreign investors.

Hypothetical: a $700,000 Florida rental exchanged into two DSTs

A Canadian resident bought a Florida rental for $700,000 in 2019, has filed T1135 Part B for it each year, and exchanges it in 2026 for $500,000 in one DST and $200,000 in another. All figures are hypothetical and rounded; confirm the cost amounts and the characterisation with your Canadian preparer.

The 2026 T1135 shows the rental through the sale date with its gain on disposition, and the two DST interests from their acquisition dates at a cost of $500,000 and $200,000, with the income each distributes. The 2026 Canadian return reports the gain on the rental, because Canada does not recognise the deferral. From 2027 the T1135 lists the two interests only. On the US side the exchange is deferred and Form 1040-NR carries Form 8824 and the section 897 statement, as described on whether a nonresident alien can do a 1031 exchange.

What to settle with your Canadian adviser before the exchange

The Canadian-side tax consequences of the exchange itself, rather than the reporting, are in the planned guide for Canadians selling US property.

• Confirm how the DST interest will be characterised for Canadian purposes and which Part B category it goes in.
• Fix the Canadian cost amount of each DST interest at acquisition, since that is the threshold and the Part B figure.
• Keep filing for the rental in the exchange year up to the sale date, with the gain on disposition shown.
• Treat the DST's annual statement to owners as the source for the income column on Part B.
• If earlier years went unfiled, raise it with your adviser before the CRA raises it with you.