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Are you ready for new Form T1134 foreign affiliate reporting?

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A new deadline is fast approaching for taxpayers required to file the revised Form T1134 Information Return Relating to Controlled and Non-Controlled Foreign Affiliates (Form T1134) that was released by the Canada Revenue Agency (CRA) in early 2021. Form T1134 has been substantially revamped and doubled in size with more detailed questions. The CRA has increased the emphasis on accuracy and completeness, with significant penalties at stake for those who do not file on time. This article outlines important information regarding key changes, shortened due dates, and applicable penalties for non-compliance. Of note is the new requirement to file a Form T1134 Summary for dormant / inactive foreign affiliates, as explained below.

Who is impacted?

Form T1134 is an annual information return that must be filed by a Canadian-resident corporation, individual, trust or certain partnerships (Reporting Taxpayer(s)) that own(s) a foreign affiliate (FA) at any time during the year.1 Form T1134 consists of a T1134 Summary and a T1134 Supplement section to be completed in respect of each FA. The revised Form T1134 is applicable for taxation years beginning in 2021 or later, and as outlined further below, is due 10 months after the Reporting Taxpayer’s taxation year.

What are the changes?

Positive changes

The following changes were introduced by the CRA to reduce the compliance burden of completing Form T1134:

Unconsolidated financial statements – Reporting Taxpayers are not required to provide unconsolidated financial statements for non-controlled FAs or FAs in which they hold less than 20% of the FA’s voting shares, except under certain situations (for example, when certain “tracking interest” rules are deemed to apply to the Reporting Taxpayer).

Joint filing option – Form T1134 can be filed jointly by different Reporting Taxpayers where they are related, share the same year-end, and report in the same currency.

Book cost – the book cost of lower-tier FAs is no longer required to be disclosed.

Financial data disclosure – total assets, accounting net income before tax, and income or profits tax paid or payable on income of an FA are no longer required to be provided.

Number of employees – revised Form T1134 requests the total number of full-time employees in a controlled FA. The prior requirement was to provide reporting for each business that the FA carried on.

Organizational charts – Reporting Taxpayers can now submit pictorial organizational charts instead of completing specific information sections in Form T1134. The organizational chart must include the name of each entity within the ownership group (both Canadian and foreign), the country or residence of each entity and the ownership interest (expressed in percentage) that each entity holds.

Relaxation of criteria for dormant / inactive FAs – less onerous reporting is allowed for a dormant / inactive FA that meets certain criteria. It was previously required that the Reporting Taxpayer’s cost amount, at any time in the year, be less than $100,000 in all its FAs. That dollar amount is now applied on an individual FA basis. Furthermore, whereas before the FA required gross receipts under $25,000 in the year, that threshold has now been increased to $100,000. Additional information on reporting for a dormant / inactive FA is provided below.

Potential challenges

Due to the following change, Reporting Taxpayers are now required to gather all necessary information and file Form T1134 with the CRA in respect to each of their FAs within a more compressed timeline.

Reporting timeline – historically, Form T1134 was to be filed within 15 months following the end of the Reporting Taxpayer’s year-end. This has changed as follows:

Reporting Taxpayer's period Shortened Form  T1134 filing timeline
Taxation years beginning in 2020 12 months after year-end
Taxation years beginning in 2021 or later 10 months after year-end

The resulting change for a typical taxation year of a Reporting Taxpayer (starting on January 1, 2021 and ending December 31, 2021) must be filed with the CRA by October 31, 2022, in respect of any FAs held at any time during the year. For a taxation year of a Reporting Taxpayer starting on January 1, 2021 and lasting less than 12 months (for example, due to an ‘acquisition of control’ transaction), the due date for filing Form T1134 may arise even earlier.

Potential consequences

The following additional disclosure requirements were introduced to enhance the CRA’s audit assessments and are expected to significantly increase the compliance burden of completing Form T1134:

Disclosure on dormant / inactive FAs – the new rules require a Form T1134 Summary to be filed with basic information concerning the FA, whereas in prior years Form T1134 was not required for a dormant / inactive FA.

Tracking interest requirements – revised Form T1134 requires additional disclosures and unconsolidated financial statements to be filed in respect of a ‘tracking interest’ under the Tracking Arrangement rules of the Act.

FA Dumping (FAD) rules, Upstream Loan rules – several points of disclosure are now required regarding these provisions in Form T1134. This includes whether certain exceptions to rules apply, such as the more closely connected business exception to the FAD rules, or whether any upstream loans have been otherwise offset by downstream FA surplus.

Adjusted Cost Base (ACB) of common and preferred shares – information regarding the ACB of common and preferred share investments in FAs including changes during the year, is now required to be disclosed in Form T1134.

Breakdown of gross revenue for controlled FAs – in addition to requiring the source of gross revenue (e.g., interest, dividends etc.) as in prior years, revised Form T1134 requires disclosing whether each such revenue is from arms-length and non-arms-length sources. Gross revenue amounts that are not identified as being from arm’s length sources will be considered to be from non-arm's length sources.

Additional Foreign Accrual Property Income (FAPI) disclosures – Form T1134 now contains additional detailed questions regarding FAPI, including Foreign Accrual Property Losses (FAPL) and Foreign Accrual Capital Losses (FACL).

Lower-tier non-controlled FAs – a new section in the T1134 Summary requires certain information for non-controlled FAs indirectly held through one or more other non-controlled FAs. Reporting in respect of such lower-tier FAs was not required in prior years.

Reorganizations and surplus accounts – although these sections were in the previous version of Form T1134, the revised version requests additional details regarding tax-deferred reorganizations, such as FA liquidations, mergers, and share exchanges.

Fines and Penalties

Failure to comply with these requirements may result in significant penalties. Reporting Taxpayers who fail to meet the filing deadline are subject to a penalty of $25 per day, with a minimum penalty of $100 and a maximum of $2,500 for each late-filed T1134 Supplement, or each late-filed T1134 Summary where all FAs are dormant / inactive. Moreover, if the Reporting Taxpayer fails to file—either knowingly or due to gross negligence—the penalty is $500 a month to a maximum of $12,000. These amounts are doubled when the CRA has issued a demand to file a return. After 24 months, the total penalty is 5% of the cost of the shares and indebtedness of the FA.

If the Reporting Taxpayer—either knowingly or due to gross negligence—makes false statements or omissions in an information return, the penalty is the greater sum of either $24,000 or 5% of the cost of the shares and indebtedness of the FA.

The revised Form T1134 instructions state that each of the related Reporting Taxpayers involved in a joint filing remain responsible for non-filed, incorrect, or incomplete returns, and penalties will apply “as if that entity filed the returns on its own.”

What do you need to do?

Revised Form T1134 requires Reporting Taxpayers to be more diligent in tracking relevant Canadian tax attributes regarding their FAs (i.e., surplus, FAPI, and ACB) and to complete and file the form with the CRA sooner than in previous years. There are potentially significant penalties if it’s filed late or incorrectly. Thus, it’s important for Reporting Taxpayers to promptly file the revised Form T1134.

These changes can be complex—but you aren’t alone. If you need support preparing your Form T1134, we can help you navigate the new requirements. Contact your local advisor or reach out to us here.

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