T1134: Information Return Related to Controlled and Non-Controlled Foreign Affiliate, underwent some changes lately. For taxpayers with tax years starting after 2020 ( i.e. fiscal years starting on January 01, 2021) form T1134 must be filed within ten months after the fiscal year-end. The form itself has undergone major changes. If you have been filing T1134 in the past, it is important to update yourself with new changes.
Who must file?
Any taxpayer who is a resident of Canada and owns shares of a “foreign affiliate (FA)” or “controlled foreign affiliate (CFA)” at any time in the year.
Only a non-resident corporation is FA or CFA. If an entity is not a corporation, it is not a FA.
Who is a Foreign Affiliate (FA)?
At a very high level, and in its short explanation form, a foreign affiliate is a non-resident corporation in which:
- A Canadian taxpayer has at least 1% equity percentage, and
- A Canadian taxpayer and related taxpayer’s equity percentage is not less than 10%
For the purpose of determination of FA status, the equity percentage is the greatest percentage holding in any class of the shares (e.g. common or preferred). It also includes both direct equity percentage and indirect equity percentage held through other intermediate corporations.
When an FA is a Controlled Foreign Affiliate (CFA)?
An FA is a CFA of a taxpayer if the taxpayer controls it. The control for this purpose is De Jure Control which means the taxpayer has the ability to elect the majority of directors of FA.
The definition of CFA is critical to determine the inclusion of Foreign Accrual Property Income (FAPI) into the Canadian taxpayer, subsection 95(1) of the Income Tax Act (ITA) also includes a hypothetical control. So the control is now determined by adding the shares of:
- Taxpayer herself and of each other person who does not deal with taxpayers at arm’s length
- Each up to four other Canadian shareholders and each person not dealing at arm’s length with them. This adds complexity as the taxpayer may not be aware of the other Canadian shareholders.
If the taxpayer owns only 50% of the shares, the FA may not be a CFA given the fact that the taxpayer can elect the majority of directors only if she has more than 50% of the shares.
Who needs to file?
If at any time during the tax year, a reporting entity has a Direct Equity Percentage in an FA or a CFA.
A reporting entity can be an individual, corporation, trust or partnership. If a directly owned foreign affiliate has an interest in another foreign affiliate, direct or indirect, T1134 filing requirements exist.
If there is a tiered corporate structure where a group of Canadian corporations is under common control, only the lowest-tier subsidiary needs to file this form. If any other corporation in the group has direct equity in a foreign affiliate, a T1134 filing requirment exists for that corporation as well.
Who does not need to file?
If an individual who becomes a tax resident of Canada does not have to file T1134 for the year of immigration. Keep in mind an individual who ceased to be a tax resident of Canada (emigrant) and later on returned to Canada to become tax resident still needs to file this form.
T1134 Changes effective 2021
There are major changes in T1134 reporting for the entities with tax years starting from January 01, 22021.
New Filing Deadlines
The reporting entity has now only 10 months after the end of its tax year to file T1134.
For example, if the tax year started on January 01, 2021, considering it ended on December 31, 2021, the new deadline is October 31, 2022.
Reporting for Dormant / Inactive FAs
Previously in the case of dormant or inactive foreign affiliates, the reporting was not required. It has changed now! There is a reporting requirement for Dormant or inactive FAs in the T1134 summary part. The thresholds for dormancy are changed though. In order to claim exemption from filing the T1134 supplement, not T1134 itself, the CAD threshold is now increased to $100,000 for both cost and gross receipts.
Additional Disclosure Requirements
There are additional reporting requirements that can significantly increase time and cost for reporting entities. Some of these additional disclosure requirements are:
- A reporting entity can, now, file as “one reporting entity’ or “a group of related entities”, if the criteria are met.
- New reporting requirements for the non-controlled foreign affiliates indirectly owned through other non-controlled foreign affiliates, lower-tiered foreign affiliates.
- Tracking interests under tracking arrangement rules of ITA require additional disclosures and unconsolidated financial statements.
- The adjusted cost basis of Common and preferred shares is now required to be disclosed on T1134 and any additional changes to it.
- Though Gross Revenue was required to be reported in previous years, now, reporting entities must disclose revenue from non-arm’s length transactions in part III of the T1134 supplement. In case if the revenue is not identified as arm’s length, it is considered non-arm’s length.
- Foreign accrual property income (FAPI) has an additional disclosure requirement. Reporting entity, now, needs to disclose if there is Foreign accrual property loss (FAPL) or Foreign accrual capital loss (FACL) in current or prior years.
- There are even more detailed disclosures required, now, for tax-deferred reorganization. For example, mergers, liquidations or share-for-share exchanges of FAs.
- Foreign affiliate dumping rules, a brand-new table in Part II of the T1134 supplement, required additional disclosures. Similarly, upstream loans in the case of Canadian resident corporations require disclosures too.
- The gross amount of debt owed to or owed from an FA is now reported if T106 is not filed before.
T1134 Summary Vs Supplemental Information
Submissions and Amendments
Penalties and Missed T1134s
Ideally, you should be filing T1134 on time. There are steep penalties for not filing T1134.
- The late filing penalty for T1134 is $25 a day, with a minimum of $100 and a maximum of $2,500. This penalty is for each T1134 supplement. The same penalty is applicable if T1134 summary is not filed where no supplement is required.
- In case of late filing by a reporting entity or intentional omissions knowingly and due to gross negligence, the penalty is $500 per month with a maximum of $12,000.
- If the CRA issued a notice as “demand to file a return”, the penalties are doubled. After 24 months of non-compliance, the penalty is 5% of the cost of the shares or indebtedness of FA.
- For intentional false statements and/or omissions on T1134, the penalty is greater of $24,000 or 5% of the cost of the shares and indebtedness of FA.
Voluntary Disclosure Program for T1134s
If a reporting entity failed to file T1134s in the past year, those information returns can be submitted using Voluntary Disclosure Program (VDP). Using VDP, if the taxpayer is eligible and has met the criteria, protects from criminal prosecution. Waiver of penalties, and interest, is possible.
If you are required to file T1134 or have not filed T1134s in the past, now is the time to correct the non-compliance. With newer changes come more complexities such as ACBs of FAs, FAPL, FACLs, Surplus accounts…
Get in touch with us today!