Revised form T1134 coming in January 2021

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

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