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Revised form T1134 coming in January 2021

The Canada Revenue Agency (CRA) will release a revised version of the form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates, in January 2021. The revised form will require taxpayers to furnish detailed information and events within the group of foreign affiliates. The revised form T1134 will take into consideration the last legislative amendment made in the year 2012 as well as address the CRA’s crucial business requirements and some of the concerns brought forward by the tax community on compliance.

In order to allow for taxpayers to be prepared for the changes, the CRA has released a preview of the revised form. The new version of the form T1134 will be effective for taxation years or fiscal periods that begin after 2020 and must be filed no later than 10 months from the taxpayers’ year-end. For taxation years or fiscal periods that begin in 2020, the old form T1134 will continue to be used and must be filed no later than 12 months from the taxpayers’ year-end.

Highlights of the key changes to the form T1134 are discussed below.

Background

The form T1134 is required to be filed by Canadian resident taxpayers including corporations, individuals, trusts, and certain partnerships[1], for any year in which the taxpayer has an interest in a controlled or non-controlled foreign affiliate, in the year. The form T1134 contains a summary form and a supplement form that is filed separately for each foreign affiliate.

A “foreign affiliate” is a non-resident corporation in which the taxpayer owns, directly or indirectly, at least 1% of any class of the outstanding shares of the foreign corporation, and the taxpayer, alone or together with related persons, owns, directly or indirectly, at least 10% of any class of the outstanding shares of that foreign corporation. The foreign affiliate will be a controlled foreign affiliate if certain conditions are met (e.g., more than 50% of the voting shares are owned, directly or indirectly, by a combination of the Canadian taxpayer, persons dealing at non-arm’s length with the Canadian taxpayer, a limited number of Canadian resident shareholders, and persons dealing at non-arm’s length with these Canadian resident shareholders).

New reporting requirements and questions in revised form T1134 for taxation years beginning after 2020

Changes in the new form T1134What are the additional reporting requirements?
Summary
  • Activity(s) of the reporting entity specifically focusing on reorganization transactions undertaken by such reporting entity.
  • Surplus account balances – for low tiered foreign affiliates that are held indirectly through other non-controlled foreign affiliates, focusing on transactions and events that affect surplus account balances (not required in existing form T1134).
New questions pertaining to
  • The reporting entity’s role in transactions and arrangements in the context of legislative amendments enacted since 2012, including upstream loan rules, foreign affiliate dumping, tracking interests, and pertinent loan or indebtedness elections.
  • Elections made in the context of foreign affiliate dividends to the reporting entity or any other affiliate company of the Canadian group.
New requirements for
  • Breakdown of the gross revenue of each foreign affiliate, including if the source was arm’s length or non-arm’s length.
  • The adjusted cost base of the foreign affiliate’s shares that the reporting entity owns directly (by way of common and preferred shares) and details of any changes that took place during the year.
Carry forward losses and FAPI
  • Details that will help determine if amounts were carried forward (such as foreign accrual property losses [FAPL] and/or foreign accrual capital losses [FACL]) to reduce the amount of foreign accrual property income (FAPI) reported for the year. Additionally, FAPL and FACL amounts will require to be reported.
Questions on foreign affiliate reorganization(s)
  • Details of reorganizations undertaken by the foreign affiliate, including liquidations, mergers, share for share exchanges, and convertible property transactions.

Measures to ease the burden of compliance

The revised form T1134 includes several changes that have been welcomed as a means of reducing the compliance burden on taxpayers. These include:

  • Joint filing option for a group of reporting entities that meet the following conditions:
    • are related to each other
    • have the same year-end
    • report in Canadian dollars or an equivalent functional currency

This will allow reporting entities to jointly file one set of T1134 summary and supplements for all foreign affiliates.

  • Exemptions from filing the form T1134
    • the threshold of total gross receipts increased to $100,000 (from $25,000) to determine the status (e.g., dormant or inactive) of a foreign affiliate.
    • exemption criteria only applied to the individual entity.
  • Unconsolidated financial statements for foreign affiliates
    • Reporting entities to only provide unconsolidated financial statements of each foreign affiliate in which it holds at least 20% of the voting shares and not for all foreign affiliates.
  • Removal of financial data fields from existing form T1134
    • The new form T1134 removes existing disclosures under Part II – Section 3 that discloses total assets, accounting net income before tax, income tax paid or payable, as well as reporting entity information in Part II – Section 1.
  •  Organization chart
    • Reporting entities can file their organization chart electronically and will not be required to complete it in a tabular format.
  • Number of employees
    • Reporting entities to disclose the total number of employees employed throughout the year by each foreign affiliate on an entity-specific basis instead of a business segment basis (where a foreign affiliate engages in multiple businesses).
  • Debt owing to or from foreign affiliates
    • Where a reporting entity has not disclosed the gross amount, it is owed from or owes to a foreign affiliate in its form T106, it discloses such information in the new form T1134 by answering a series of questions.

What should taxpayers do to prepare?

The CRA’s introduction of revised form T1134 requiring comprehensive information on foreign affiliates is aligned with the global trend in tax authorities developing and implementing mechanisms to enable enhanced tax transparency. These initiatives follow the launch of the Base Erosion Profit Shifting (BEPS) project by the Organization for Economic Cooperation and Development (OECD). While it will be critical that taxpayers have systems and procedures to gather and furnish this information, this might be an appropriate opportunity to rely on the data-gathering exercise to rationalize corporate structures and identify any risks/gaps that might exist in the value-chain and develop strategies to mitigate them.

With the new form T1134 being introduced in January 2021, taxpayers should ensure the information on surplus calculations and adjusted cost base of foreign affiliate shares are up to date. Considering the new reporting requirements and a shorter deadline to file (10 months) the new form T1134, taxpayers should also consider how such additional information will be gathered specifically covering details in the context of upstream loans, foreign affiliate dumping, and elections made.

Furthermore, for Canadian headquartered multinational groups that meet the consolidated threshold of EUR 750 million requirement to file a Country-by-Country Report (CbC), it will be important that some of the information disclosed on related party foreign affiliates in the new form T1134, be consistent with the CbC Report, where appropriate. Furthermore, taxpayers implementing processes and procedures to gather information to include in the CbC Report should evaluate changes required to their systems to integrate the form T1134 reporting requirements and leverage efficiencies.

How Segal LLP can help?

Our multi-disciplinary tax and transfer pricing teams can assist taxpayers with complex reporting requirements and use such information to manage potential risks identified. This information can be used to determine completeness and accuracy by simulating it in advanced analytical tools and the outcomes can then be “risk classified” in the context of an ever-evolving international tax and transfer pricing environment.

For more details on how we can help, contact one of our Tax Partners Andrew Shalit, Howard Wasserman, Dora Mariani, or Principal & Transfer Pricing Leader Avinash S. Tukrel.

[1] If the share of the income or loss of the partnership for the year of non-resident members is less than 90% of the income or loss of the partnership, and a non-resident corporation or trust would be a foreign affiliate of the partnership if the partnership were a person resident in Canada

2020 Tax Planner

Dear Clients, Friends & Associates,

As we come to the end of 2020, our tax team has been busy compiling a list 
of tax planning ideas that may potentially increase tax savings for you and your
family members. The topics included in this year’s tax planner include:

  • New Tax Rules
  • Personal, Trust and Corporate Tax Changes
  • Personal and Corporate Year-End Planning
  • Key Dates
  • Personal and Corporate Tax Rates

Segal’s 2020 Tax Planner is viewable here.

Should you have any questions or concerns, your Segal advisor can assist you
in determining which of these ideas is the best fit for you.

Please do not hesitate to call your Segal advisor or our tax team with any
questions about this year’s tax planner.

Thank you,

Segal LLP | Taxation Services

Segal Recognized By CLA

Segal LLP is pleased to announce that we served as advisors to the Aquilini/Enthusiast merger which has won the Excellence Award for the Capital Markets Deal of the Year by the Canadian Law Awards.

We also want to extend a congratulations and a job well done to our own team from Segal who provided audit and advisory services as part of this transaction. We pride ourselves on a diverse, experienced and hard-working team and we are thrilled to be recognized.

View the full list of 2020 Winners and Finalists here.

Canada Emergency Rent Subsidy (CERS)

On October 9, 2020, the Department of Finance announced the introduction of the Canada Emergency Rent Subsidy (CERS). This new subsidy will provide direct relief to businesses, non-profits and charities that continue to be economically impacted by the COVID-19 pandemic.

The CERS is a replacement of the Canada Emergency Commercial Rent Assistance (CECRA) program, which ended in September 2020. The CECRA program was generally viewed as unsuccessful since the application process was complex and it required the landlord to apply for unsecured forgivable loans that were based on tenants meeting stringent criteria (i.e., 70% decline in pre-COVID-19 revenues).

The CERS will provide benefits directly to qualifying renters and property owners, without requiring the participation of landlords. The CERS is available retroactive to September 27, 2020 until June 2021. The Federal government has only provided details for the first 12 weeks of the program, until December 19, 2020.

Eligible Entities

Eligibility criteria for the CERS generally aligns with the Canada Emergency Wage Subsidy (CEWS) program. Eligible entities include individuals, taxable corporations and trusts, non-profit organizations and registered charities. Eligible entities also include the following groups:

  • Partnerships that are up to 50% owned by non-eligible members;
  • Indigenous government-owned corporations that are carrying on a business, as well as partnerships where the partners are Indigenous governments and eligible entities;
  • Registered Canadian Amateur Athletic Associations;
  • Registered Journalism Organizations; and
  • Non-public colleges and schools, including institutions that offer specialized services, such as arts schools, driving schools, language schools or flight schools. 

In addition, an eligible entity must meet one of the following criteria:

  • Have a payroll account as of March 15, 2020 or have been using a payroll service provider;
  • Have a business number as of September 27, 2020 (and satisfy the Canada Revenue Agency that it is a bona fide rent subsidy claim); or
  • Meet other conditions that may be prescribed in the future.

Eligible Expenses

Eligible expenses for a location for a qualifying period will include the following:

  • Commercial rent (including gross rent, rent based on a percentage of sales, profits or similar criterion, and amounts paid under a net lease);
  • Property taxes (including school taxes and municipal taxes);
  • Property insurance
  • Interest on commercial mortgages (subject to limits) for a qualifying property.

Please note that subleasing revenues would reduce eligible expenses. As well, any sales tax (e.g., GST/HST) component of these costs would not be considered an eligible expense.
 
Eligible Expense Limitations:

  • Eligible expenses would be limited to those who paid under agreements in writing entered before October 9, 2020 (and continuations of those agreements) and would be limited to expenses related to real property located in Canada.
  • Expenses that relate to residential property used by the taxpayer (e.g., their house or cottage) would not be eligible.
  • Payments made between non-arm’s length entities would not be eligible expenses.
  • Mortgage interest expenses in respect of a property primarily used to earn – directly or indirectly – rental income from arm’s-length entities would not be eligible.
  • Expenses for each qualifying period would be capped at $75,000 per location and be subject to an overall cap of $300,000 that would be shared among affiliated entities.

Calculating Revenue

  • Revenues will be calculated in the same manner as under the CEWS program.
  • Entities must calculate their revenue from their ordinary activities in Canada earned from arm’s-length sources, determined using their normal accounting practices.
  • Revenues from extraordinary items or amounts on account of capital are excluded.
  • Registered charities and non-profit organizations have the option to exclude revenue from government sources as part of the calculation. Once selected, the same approach would have to apply throughout the program period.
  • The subsidy includes special rules to account for certain non-arm’s length transactions, such as where an entity earns all or substantially all of its revenue from a related party that in turn earns arm’s-length revenue.
  • Affiliated groups that do not normally compute revenue on a consolidated basis may elect to do so.

Reference Periods for the Drop-in Revenues Test

  • To claim the CERS, entities will be required to calculate their revenue, and compare this amount to a reference period to determine their revenue drop, in the same manner as under the CEWS program.

  • Once an entity has chosen to use either the general or alternative approach, they must use that approach for each of the three periods. The approach chosen would apply to both the base CEWS and the CERS.
  • An eligible entity would use the greater of its percentage revenue decline for the current qualifying period and that for the previous qualifying period in order to determine its subsidy rate. This aligns with the CEWS program. 

Rent Subsidy for Entities Impacted by the Crisis

  • Qualifying entities that have suffered a revenue drop would be eligible for a subsidy on eligible expenses. As shown in the table below, the base rate structure mirrors the CEWS rate structure.

Lockdown Support Subsidy

  • A new Lockdown Support Subsidy of 25% will be available to entities with locations that are temporarily forced to close, or temporarily have their business activities significantly restricted due to COVID-19. This “top-up” CERS of 25% would apply to the same eligible expenses noted above. 
  • In order for an entity to qualify for the Lockdown Support Subsidy for a qualifying property, it must meet the following conditions:
    • The entity qualifies for the base CERS; and
    • A public health order requires that the entity completely shut down the location OR cease some or all of the activities that account for at least 25% of the entity’s pre-pandemic revenues at that location for at least a week. 
  • Entities may be eligible for the subsidy for public health restrictions such as:
    • Restrictions that disallow indoor dining
    • Closure of retail stores, bars, theatres, or fitness centres
    • Restrictions on the types of personal services that can be provided
    • Closure in relation to a COVID-19 outbreak on the premises
  • The Lockdown Support Subsidy is not available for entities that reduced business hours, or were affected by travel restrictions or physical distancing requirements, etc.
  • If an entity is subject to a public health restriction and has to ceases activities for only part of a qualifying period, the Lockdown Support Subsidy would be pro-rated for the number of days in the period during which the relevant location was affected.
  • Expenses for the Lockdown Support Subsidy for each qualifying period would be capped at $75,000 per location but would not be subject to the overall expense cap of $300,000 shared among affiliated entities that applies to the CERS.

General Comments

  • Legislation to implement the new CERS and Lockdown Support Subsidy received first reading in the House of Commons on November 2, 2020 and is expected to soon pass into law.
  • The application process for these new subsidies is not yet available.
  • The subsidy is deemed to be government assistance received by the eligible entity immediately before the end of the relevant qualifying period the claim relates to, regardless of when the eligible entity applies for or receives the subsidy. It will be included as income for tax purposes at that time.
  • The legislation includes anti-avoidance rules to address transactions that increase the qualifying rent expenses of an eligible entity, where one of the main purposes of the transaction is to increase the amount of the subsidy.

Please contact Segal LLP for any assistance required.

Managing Transfer Pricing Risks and Their Impact In Uncertain Times

The world as we know has and continued to rapidly change because of COVID-19 and the ongoing political developments such as the upcoming elections in the United States (US), the United Kingdom’s (UK) impending exit from the European Union (BREXIT), trade wars between economic superpowers, and climate change, among other global emergencies.

COVID-19 being the most recent health crisis was categorized as a pandemic by the World Health Organization (WHO). This pandemic has not just impacted individual health and stretched health care systems worldwide, it has substantially impacted the world’s financial markets and economies, affecting global supply chains and profitability for years to come.

China had to initiate factory lockdowns early on, which impacted global production output and caused delays in distribution to end markets. Factory closures in China and lockdowns in key economic centers worldwide, had a domino effect on other industries such as oil and gas, airlines and hospitality and retail, among others. Governments worldwide have announced emergency fiscal measures including Central Banks slashing interest rates on borrowings to insulate their economies from the effects of recession.

While the macro economic impact of COVID-19 crisis continues to be evaluated, it is critical that multinational corporations that are operating cross-border and entering into inter-company transactions, manage their response to this development. This would include assessing the impact the crisis has had on their profitability as well as a potential overhaul of their global supply chains. Some considerations to note from a transfer pricing perspective are:
1. Revisit transfer pricing models and policies: In instances where a multinational group has had a significant impact on its performance and chooses to restructure its operations by reallocating functions, assets and risks (FAR) to better manage its supply chain it will be important that the transfer pricing model / policy be revisited and updated accordingly. Where this results in a change to the transaction profile as well as the terms and conditions that govern inter-company contracts (examples include, an increase in inter-company financing and related guarantees, increase/decrease in sale/purchase prices, interactions due to inter-company services, negotiation of customer contracts, change to credit terms, impact on inventory flows due to supply disruptions among others), it could result in changes to inter-company pricing basis and the arm’s length returns attributable to each entity involved. It should not be assumed in the current environment, where the parent entity that traditionally performed key Functions, owned high-value Assets (including intellectual property) and assumed significant Risks (FAR), would be the only entity to centralize Group-wide losses while the other entities remain profitable.
2. Perform Function, Asset and Risk profiles and Value Chain analysis: While updating transfer pricing policies and inter-company pricing models, it is critical that the multinational group perform a thorough value chain analysis to reflect changes that may have occurred in each of the entity’s key functions, asset ownership and assumption of risks.
3. Economic analysis: One of the key principles when performing an economic analysis to determine the arm’s length range of returns to substantiate a taxpayer’s position is that significant events are factored in and such analysis be revisited. The traditional practice of updating or a roll-forward of comparable company benchmarks/prices using the comparable uncontrolled price (CUP) method, are unlikely to reflect the most up to date economic realities faced by the multinational group. As such, taxpayers may have to consider the following options:
  • Reallocation of the FAR and use of the Profit Split Method (PSM) – taxpayers may potentially consider adoption of the profit split approach and allocate profits/losses, if suitable. Although when adopting the PSM, it is crucial that several (stringent) conditions are met and there is a clear identification of value generated by each entity involved, resulting in the allocation of profits/losses. A simplistic approach to adopting the PSM is not only likely to attract scrutiny, it will be challenging to document the rationale and support the arm’s length nature of such an allocation.
  • Consistent loss-making comparable benchmarks – when performing a benchmarking study to identify a comparable set, the approach of outright rejecting consistent loss-making companies may have to be revisited.
  • Use of the CUP and price comparisons – where a taxpayer relies on price benchmarks using the CUP method, it will be important that the 5 factors of comparability be evaluated in the context of any changes and determine if the price comparison continues to remain appropriate.
4. Employees and secondment arrangements: cross-border arrangements include key personnel (employees) and it is, therefore, critical that multinational groups assess the impact of ongoing changes to immigration law considering a crisis like COVID-19. These changes will have a direct impact on employees on secondments to other countries as well as the inter-company arrangement(s) in question. Additionally, if employees that travel for business to other locations and are unable to return to their home country due to travel restrictions and advisories, therefore, warranting remote working arrangements, such arrangements could create permanent establishment (PE) implications for the multinational group. While the Canada Revenue Agency (CRA) has issued pronouncements that there will not be a PE if the employees are in Canada because of travel restrictions, this position might differ country to country.
5. Governance and implementation of changes: Where multinational groups make changes to the transfer pricing model/policy, these changes should be immediately reflected in the inter-company agreements, inter-company accounting systems, invoices as well as ensure any year-end adjustments required are put through prior to the close of the financial year or filing the annual tax return, to reflect the up to date facts and circumstances.
6. Document impact on business: where multinational groups have made changes to their transfer pricing model/policy or adversely impacted by the COVID-19 crisis, it will be imperative that taxpayers be able to articulate such changes and/or the reasons for changes to the profitability, in their annual transfer pricing documentation. While this could vary depending on the industry, it will be crucial to document any variances to performance as a first instance to defending the taxpayer’s transfer pricing position to tax authorities, going forward. Alternatively, if a taxpayer is pursuing an Advance Pricing Arrangement (APA), the taxpayer should model and document the impact on the business as this will qualify as a change to the crucial, underlying assumptions on which the APA is/will be based.
7. Manage transfer pricing obligations – where a multinational group is required to prepare and file a Country-by-Country Report (CbCR) and/or CbCR notifications, local transfer pricing disclosures as well as prepare or file a Group Master File, multinational groups should monitor any changes to filing deadlines (where these might be extended in the short term). Such filings should incorporate both quantitative (information on accounting adjustments, write-off’s, disposal of assets etc.,) and qualitative information on the impact on the multinational group’s business. If one or more entities is faced with a local transfer pricing audit, it is important that deadlines be managed with the tax authority accordingly and any delays to submission of information requested are agreed upon.
8. Other taxes – if a multinational group, restructures its operations due to the impact of COVID-19 and the inter-company transactions are subject to withholding taxes, Customs or Goods and Services Tax (GST) / Harmonized Sales Tax (HST) / Value Added Tax (VAT) etc., it will be critical that the effect of these taxes be assessed when making changes. Alternatively, if a multinational group exits a certain market, it might need to meet exit tax and compliance obligations, prior to such closure or disposal.
Managing transfer pricing risks is going to be critical as businesses and Governments navigate uncertain times. Multinational Groups until most recently have been witness to the renewed focus being placed on transfer pricing and tax transparency by the Organisation for Economic Cooperation and Development (OECD) by way of the BEPS 2.0 project. With this continuing to be a key focus for the OECD and tax authorities worldwide, along with a global crisis such as COVID-19, transfer pricing arrangements are likely to see increased scrutiny by tax authorities and viewed as a key driver for tax revenue to balance fiscal deficits and manage tax collection targets.

For more information on how our team can help you navigate your specific transfer pricing needs, contact our Transfer Pricing Leader, Avinash S. Tukrel.