Canada: T1134 Form For Foreign Affiliates

Last Updated: March 8 2016
Article by David Rotfleisch

T1134 Canadian Income Tax Form –– Toronto Tax Lawyer Analysis –– Reporting Foreign Affiliates to CRA

T1134 Form – Introduction by Toronto Tax Lawyer

The Canadian Income Tax Act levies income tax on the worldwide income of resident Canadians. Multinational business structures are efficient, from both an operational and financial standpoint, and are often necessary in order to transact with certain entities located outside Canada. However, the practical difficulties associated with monitoring international investment and business activities cause headaches for Revenue Canada. To help combat this issue, the Income Tax Act requires Canadian taxpayers to report income that stems from, or assets situated in, a foreign jurisdiction. This article will focus on the obligation of Canadian taxpayers to file form T1134 with CRA with respect to the active foreign affiliates of the taxpayer, the consequences of failing to do so and the exemptions available to what are becoming fairly onerous reporting requirements.

The T1134 Reporting Obligation

Subsection 233.4(4) of the Income Tax Act mandates that each "reporting entity" file a prescribed form "in respect of each foreign affiliate of the entity. "Reporting entity" is defined in paragraph 233.3(1)(a) to include a resident taxpayer "of which a non-resident corporation is a foreign affiliate at any time in the year". Under subsection 95(1) of the Tax Act, a corporation outside Canada is a foreign affiliate of a resident taxpayer if:

  • The taxpayer's equity percentage in the corporation is 1% or greater; and
  • The equity percentages of the taxpayer and each "person" related to the taxpayer total to 10% or greater.

The definition is meant to catch circumstances in which a single taxpayer has a 10% or greater interest in a foreign corporation, or where a taxpayer and related parties (discussed below) combine to have a 10% or greater interest in a foreign corporation. Subsection 248(1) of the Tax Act defines "person" to include a corporation, and that the definition of "related persons" in subsection 251(2) of the Income Tax Act includes not only relations by virtue of blood, marriage, common law partnership or adoption, but also situations where corporations are controlled by individuals that are related to one another. The rules relating to foreign affiliates and related persons under the Tax Act are expansive and for the purposes of this article it suffices to say that related individuals cannot easily circumvent the provisions of the Income Tax Act by using the corporate form.

The form that has to be filled out and submitted by each reporting entity is Revenue Canada's T1134 "Information Return Relating to Controlled and Not-Controlled Foreign Affiliates". Form T1134 requires the reporting entity to provide CRA with information about the foreign affiliate, including but not limited to: the book value of the shares in the foreign affiliate owned by reporting entity, any amounts owing to the foreign affiliate by the reporting entity and vice-versa, consolidated financial statements of the foreign affiliate (if available), total assets of the foreign affiliate, net income of the foreign affiliate, and taxes paid or payable by the foreign affiliate on account of its net income, the breakdown of the foreign affiliate's income and whether the foreign affiliate earned any foreign accrual property income (FAPI), during the reporting period. Completion of the T1134 is an arduous task that requires a detailed analysis of a foreign affiliate's financial position and business activities, which almost certainly requires the assistance of one of our expert Toronto tax lawyers.

Penalties for Failure to File Form T1134 When Required

Failure to file form T1134 when required carries significant penalties on an escalating scale. The simple failure to file form T1134, regardless of intent or knowledge, carries with it a penalty of $2,500 for each year the form is not filed according to subsection 162(7) of the Income Tax Act. Under subsection 162(10) of the Tax Act, every person or partnership who "knowingly or under circumstances amounting to gross negligence" fails to file a T1134 as and when required is liable to a penalty of $500 per month up to a maximum of 24 months, or $12,000, for each failure to file form T1134. Further, if more than 24 months have passed since form T1134 was required to be filed with CRA, and the conditions of subsection 162(10) are met, under subsection 162(10.1) of the Income Tax Act the penalty is equal to 5% of the "greatest of all amounts each of which is the total of the cost amounts to the person or partnership at any time in the year or period of a property of the person or partnership that is a share of the capital stock or indebtedness of the affiliate". So you can see that the penalties for failing to file form T1134 are significant and have the potential to cripple a taxpayer's operations, especially if several years worth of failure to file penalties are levied following a CRA audit.

Exemptions to the Reporting Obligation

There are exemptions to the requirement to file form T1134 with Revenue Canada. Individuals, which are defined to exclude corporations in subsection 248(1) of the Tax Act, do not have to file a T1134 for the year in which they first became resident. This does not include a situation where a former resident becomes a resident of Canada following a period as a non-resident.

In addition to the above, a taxpayer is not required to file form T1134 if the aggregate cost amount to the taxpayer of its interest in all of the foreign affiliates of the taxpayer is less than $100,000 and the particular foreign affiliate is "dormant" during the reporting period. For the purposes of form T1134, a dormant foreign affiliate is one that:

  • Had gross receipts (including proceeds from the disposition of property) of less than $25,000, and
  • At no time in the year had assets with a total fair market value of more than $1,000,000.

The information portion of form T1134 explains that the term "gross receipts" means "any receipt received in the year" and "includes all non-revenue receipts, such as loans, etc." As can be inferred by the term, whether or not a foreign affiliate is "dormant" is more a question of its level of activity and has nothing to do with revenue or profitability. Note that the question of dormancy is not relevant when the aggregate cost of the taxpayer's interests in foreign affiliates is $100,000 or more and in such a case form T1134 must be filed with CRA.

By making the fair market value, and not the cost, of the foreign affiliate's assets the relevant consideration when determining whether or not the particular foreign affiliate is "dormant", form T1134 leaves room for uncertainty: while taxpayers can reasonably be expected to keep track of the cost value of the assets of a foreign affiliate, fair market value, by definition, is often not readily ascertainable until assets are sold to arm's length parties on the open market. In Desmarais v The Queen, 2013 TCC 356, this uncertainty worked in favour of a taxpayer who failed to file T1134-A (a predecessor to the modern form T1134) in respect of a foreign affiliate of the taxpayer. In Desmarais, CRA reassessed the taxpayer (an individual) in 2010 for the 2003 and 2004 taxation years, in order to levy penalties against the taxpayer under subsection 162(7) of the Income Tax Act because the taxpayer had allegedly failed to file form T1134-A with the Minister in respect of a foreign affiliate of the taxpayer. Since the reassessment was far beyond the normal three-year reassessment period, in other words statute barred, in order to "open up" the 2003 and 2004 taxation years for reassessment, the Minister was required by subparagraph 152(4)(a)(i) of the Tax Act to show that the taxpayer had made a representation "attributable to neglect, carelessness or wilful default" when he failed to file form T1134-A for the 2003 and 2004 taxation years. The corporate structure was as follows:

  • The taxpayer owned 29% of the shares of a non-resident corporation, "OREX";
  • OREX owned approximately 49% of the shares of another corporation, "AIMO";
  • AIMO owned 20% of the shares of a Russian corporation, "Okhotsk".

On June 30, 2006 AIMO sold its 429 shares in Okhotsk for $7,500,000 (USD) and it was on this basis that CRA argued that the fair market value of OREX's investment in AIMO was worth more than $1,000,000 (CAD) during the 2003 and 2004 taxation years and that therefore OREX was not a "dormant" foreign affiliate according to the definition on form T1134-A. The taxpayer argued, to the contrary, that OREX was in fact "dormant" and provided the following evidence:

  • The financial statements of OREX listed the book value of its investment in AIMO at one Swiss Franc as December 31, 2002; and
  • AIMO's financial statements for the 2003 and 2004 taxation years listed the book value of the 429 shares it owned in Okhotsk at $3,689.

The Tax Court of Canada allowed the taxpayer's appeal, and vacated the assessments, because "the market value of AIMO's investment in Okhotsk was only really determined at the time of the redemption, in August 2006, of the 429 shares for US$7,500,000, and it was not until then that it became possible to establish with some degree of certainty the fair market value of OREX's investment in AIMO". Essentially, because there was no certainty as to the value of OREX's investment in AIMO during 2003 and 2004, the taxpayer did not make any misrepresentation "attributable to neglect or wilful default" by failing to file form T1134-A, and that therefore Revenue Canada did not meet the evidentiary burden required to allow the Minister reassess the taxpayer in Desmarais outside the normal three-year period. The Desmarais case is an example of issues that can arise when a reporting requirement is based on the fair market value, and not the cost, of an asset held by a foreign affiliate, as fair market value is often only evident when the asset is disposed of, whether by the specific taxpayer or another holder of the asset. It seems as if, in Desmarais, Revenue Canada was attempting to either make an example of the taxpayer or establish a precedent for levying penalties under subsection 162(7) of the Tax Act: reassessing statute-barred taxation years, in addition to litigating in Tax Court, for the sake of assessing $5,000 worth of penalties is not logical when viewed in isolation.

Voluntary Disclosure for Failure to File Form T1134 by Canadian tax lawyers

The reporting obligation of taxpayers to file form T1134 is complicated, often requiring a detailed analysis of the provisions of the Canadian Tax Act by one of our top Canadian tax lawyers. Taxpayers who have not filed T1134 as required may be eligible for Revenue Canada's Voluntary Disclosures Program if:

  • CRA has not contacted you about the failure to file form T1134;
  • At least one year has passed since you were required to file the form T1134;
  • The failure to file form T1134 is subject to a penalty; and
  • The voluntary disclosure identifies all areas of the taxpayer's non-compliance with the Income Tax Act.

If the above pre-requisites are met, a taxpayer has a strong chance of making a successful voluntary disclosure to CRA for the failure to file form T1134 as and when required. A successful voluntary disclosure completely eliminates penalties, removes the possibility of criminal prosecution and often offers partial interest relief on any taxes that may be owing. Failed reporting obligations under the Tax Act are ideally suited for the voluntary disclosures program: the penalties are severe and taxes owing are often minimal or nil.

Conclusion – T1134 Requirements

The historically popular exercise of moving assets and operations outside Canada, often in attempts to reduce domestic income taxes owing by enjoying lower income tax rates in offshore jurisdictions, now comes with the increasingly onerous reporting requirements imposed by subsection 233.4(4) of the Income Tax Act and, by extension, form T1134. Significant penalties can and will be charged to taxpayers who do not meet their obligation to file form T1134 with Revenue Canada if and when required.

There are exemptions to the T1134 reporting requirement, but even the exemptions often require taxpayers to be vigilant in their record-keeping and accurate in conducting valuations of their foreign affiliates, tasks that can be overwhelming for individuals and small, privately-held corporations. Our top Toronto tax lawyers are experts on CRA's Voluntary Disclosures Program and can accurately determine whether you have to file a T1134 with respect to your foreign affiliates. If we determine you are not current with your obligation to file form T1134 with CRA, our Toronto tax lawyers firm can help you get compliant with the Income Tax Act by filing a Voluntary Disclosure with CRA to eliminate any possible penalties or prosecution, and to reduce interest on any unreported income owing on account of your foreign affiliates.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Osler, Hoskin & Harcourt LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions