The Canada Revenue Agency (CRA) has various tools available to collect information on Canadian resident taxpayers' interests in offshore investments. Form T1134 - Information Return Relating to Controlled and Not-Controlled Foreign Affiliates (Form T1134) is one such tool: it is used to collect information on investments in foreign corporations held by Canadian residents. Unchanged since 2012, the CRA is making significant changes that are effective for taxation years that begin after 2020.
Form T1134 is required to be filed to report an interest in a foreign affiliate (FA)/controlled foreign affiliate (CFA). An FA is a non-resident corporation where the Canadian taxpayer has at least a 1% direct equity interest and at least a 10% equity interest directly or indirectly when taking into account related parties of the Canadian taxpayer. A CFA is an FA that is controlled by the taxpayer. Form T1134 captures a variety of information regarding a taxpayer's offshore operations and investments in FAs/CFAs. Form T1134 must be filed by all Canadian resident taxpayers, which includes corporations, individuals, trusts, and partnerships where certain criteria are met.
Changes to Form T1134 filing deadlines
Coupled with the change to Form T1134, the filing deadline has also changed. Form T1134 currently has to be filed within 15 months following the end of the Canadian resident taxpayer's year-end. For taxation years beginning in 2020 or later, the filing is now 12 months after the taxpayer's year-end. For taxation years beginning in 2021 and later, the filing deadline will be reduced to 10 months after the taxpayer's year-end.
Key changes to revised Form T1134
The following is a summary of some of the key changes to Form T1134:
Additional disclosure requirements to revised Form T1134
- Length of Form T1134 - The revised form has doubled in length from the previous form. There are additional disclosures and information required, which will add complexities for taxpayers to ensure the form is complete and accurate.
- Reorganizations of FA/CFAs - New questions added to the form require disclosure of tax-deferred reorganizations of the share capital of the FA/CFA under Canadian tax rules.
- Pertinent loans or indebtedness (PLOI) - Disclosure is now required as to whether any PLOI elections were filed with respect to cross-border debt. A PLOI is a loan made by a corporation resident in Canada (CRIC) to an FA subject to a notional interest income inclusion by the CRIC. By filing a valid PLOI election, the loan can remain outstanding and not be subject to other punitive Canadian tax rules.
- Tracking interest - New questions have been added to specifically address tracking interests. Tracking interests were initially introduced as part of the 2018 federal budget and were designed to capture arrangements where a foreign investment was structured as an FA rather than a CFA to avoid immediate taxation for the Canadian resident taxpayer of any Foreign Accrual Property Income earned in the FA. Revised Form T1134 will require taxpayers to take a look at their interest in the FAs in which they own shares to ensure they are not subject to the tracking arrangement rules. Under the new disclosure rules, unconsolidated financial statements are required to be filed with Form T1134 where there is a tracking interest and, practically, it may be difficult to obtain this information.
- Foreign affiliate dumping (FAD) - Revised Form T1134 contains detailed questions around the FAD rules and the various provisions that impact these rules. The FAD rules are an extremely complex set of provisions and generally apply when a Corporation Resident in Canada (CRIC) makes an investment in an FA/CFA and the CRIC is controlled by a non-resident. Investments in FA/CFAs therefore will need to be monitored to determine whether the FAD rules will apply.
- Surplus pools - Taxpayers must maintain calculations of the surplus pools (i.e., exempt, taxable, hybrid) to support any dividend deduction claimed in the year on dividends received from an FA. While this requirement is not new, the revised Form T1134 now requires disclosure as to whether the dividend was a cash or an in-kind dividend. Typically, taxpayers may not maintain calculations of the surplus pools until the dividend is paid, and this can be problematic when several years of calculations are required and information is not readily available to ensure the proper surplus pool is available for distribution.
- Upstream loan disclosure - Specific disclosures around upstream loans are now required. An upstream loan occurs when a Canadian taxpayer receives a loan or becomes indebted to an FA. Upstream loans can result in an income inclusion for the Canadian taxpayer unless certain exceptions apply.
- Tax cost of common/preferred shares - The adjusted cost base (“ACB”) of common and preferred shares in the FA/CFA must now be disclosed on Form T1134. This may require additional analysis to ensure the ACB is correct and accurate especially if there have been changes in the ACB. Changes in the ACB in the year must also now be disclosed.
- Breakdown of gross revenue - The source of revenue in the FA/CFA must now be broken down between arms-length and non-arms-length. This may require additional analysis to obtain this breakdown.
- Foreign accrual property income (FAPI)/foreign accrual property losses (FAPL)/foreign accrual capital loss (FACL) - New questions have been added to disclose whether FAPI was reduced by carry-forward FACL/FAPLs. Therefore, taxpayers will need to ensure good documentation exists with respect to tracking FAPI/FAPL/FACL since these amounts are not directly tracked in the Canadian tax returns of the Canadian resident shareholder.
Relieving changes to the revised Form T1134
A number of changes were also introduced that will help to relieve the compliance burden of filing Form T1134 in some cases:
- Dormant or inactive FA/CFAs - Previously, there was an administrative safe-harbor test that exempted Form T1134 from applying if, at any time in the year, the interest in all FAs of the Canadian resident taxpayer is less than $100,000 and the FA was “dormant” or “inactive.” This administrative test has been expanded and now applies at each individual legal entity level (i.e., you do not have to apply the $100,000 test to the aggregate of all interests in FAs held by the Canadian resident taxpayer). In addition, the thresholds in determining if an FA is “dormant” and “inactive” is now $100,000 CAD for both the cost amount (previously $100,000) and gross revenues (previously $25,000).
- Unconsolidated financial statements - Where the reporting entity holds at least 20% of the voting shares in the FA, unconsolidated financial statements will need to be filed. Previously, unconsolidated financial statements were required for all FAs/CFAs. This is a welcome administrative change since it was not always feasible for the taxpayer to obtain unconsolidated financial statements for smaller investments in FAs.
- Joint filing option - There is a new joint filing option for the T1134 Summary and Slips where the reporting groups are related, have the same year-end, and report in the same currency. This option will streamline some of the compliance burden for FAs/CFAs that are owned by a group of entities.
- Financial data disclosure - New Form T1134 includes the removal of the requirement to provide total assets, accounting net income before tax, and income or profits tax paid or payable on income (previously in Part II, Section 3 of Form T1134).
- Number of employees - New Form T1134 requires total employees of an interest in an FA/CFA to be reported only. Currently, this must be reported on a business-by-business basis.
- Organizational charts - Organizational charts can now be submitted electronically to fulfill information about the legal structure of the entities. The organizational chart must include the name of each entity within the group (both Canadian and foreign entities), the country of residence of each entity, and the ownership interest (expressed in percentage) that each entity holds. Previously, this information was captured in Section 3 of the T1134 Summary Form and was cumbersome to complete for complex structures.
The CRA has stated that penalties will be applicable not only for failure to file the form, but also for incorrect and incomplete information on the return. Given the additional amount of disclosures required under the revised Form T1134, taxpayers may find themselves subject to penalties if they can't accumulate all required information by the filing deadline. The CRA has indicated that a due diligence exception is available if the information is not available at the time the form is filed. However, taxpayers will have to prove they qualify for this exception based on their facts.
What taxpayers need to do
Overall, the changes to Form T1134 are significant. The additional disclosure and reporting requirements, combined with the change in filing deadlines, will make it challenging for taxpayers to ensure the revised Form T1134 is complete and filed on a timely basis. To ensure taxpayers are ready for the changes, they should do the following:
- Review their current organizational structure and understand if there will be changes to the structure and how they will impact the information required to be reported on the revised Form T1134.
- Ensure surplus calculations are submitted and kept up to date.
- Review the application of, the PLOI, upstream loans, and FAD rules to all investments in FAs/CFAs.
- Track the ACB in common and preferred shares of all FA/CFAs.
- Update the FACL/FAPL carryforward schedules for all FA/CFAs.
Contact one of our international tax BDO advisors to discuss how these changes will impact you and your business.
Harry Chana, International Tax and Transaction Tax Practice Leader
The information in this publication is current as of February 2, 2021.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.