What is Form T106?
Form T106 is an information return required by the Canada Revenue Agency (CRA) to report certain cross-border transactions.
It is used by Canadian tax resident corporations, trusts, individuals, and partnerships (or non-residents carrying on business in Canada) to disclose non-arm's-length transactions with non-residents. These include transfers of property, services, rents, royalties, loans, or other financial dealings between related Canadian taxpayers and their foreign affiliates or related parties.
Filing is required if the total value of reportable transactions exceeds CAD $1,000,000 in a tax year.
Reportable transactions include dealings in tangible property, rents, royalties, intangible property, services, loans, advances, or other receivables and payables with non-residents (including beginning and ending balances as well as gross increases and decreases).
For example, a Canadian parent company may transfer funds to its foreign subsidiary to cover expenses, and the subsidiary may later return funds when available. Each transfer counts as a reportable transaction, making it easy to exceed the $1,000,000 threshold without realizing it.
New de minimis policy for Form T106
The individual de minimis threshold for Form T106 refers to the minimum total value of transactions with a single non-resident that must be reported in Part III of the T106 Slip. Taxpayers must still file the T106 information return to report other required information, but detailed reporting in Part III is not necessary when total transactions with a specific non-resident are:
- Below CAD $25,000 for tax years before 2022, or
- Below CAD $100,000 for tax years 2022 and later.
Penalties for failure to file T106
The T106 information return must be filed within six months of the corporation's year-end. Late filing penalties start at $100 and increase by $25 per day, up to a maximum of $2,500 per year. However, if a corporation has not filed due to being unaware of the requirement, penalties may be waived if the return is submitted under the Voluntary Disclosure Program.
Voluntary disclosure application
The Voluntary Disclosures Program (VDP) gives taxpayers the chance to come forward to the Canada Revenue Agency (CRA) to correct errors or omissions in their tax affairs. When accepted, the VDP may grant relief from penalties and some interest, as well as protection from criminal prosecution. However, taxpayers are still required to pay any taxes owing in full.
The purpose of the VDP is to promote fairness, not to reward non-compliance. Taxpayers who follow the rules should not be placed at a disadvantage compared to those who make a disclosure. The program is not intended as a means for taxpayers to deliberately avoid their legal tax obligations.
If VDP relief is granted, a taxpayer may benefit in three key ways:
- Relief from penalties
- Partial relief from interest
- Protection from criminal prosecution for the disclosed issues
The scope and type of relief provided will depend on the specific circumstances of the disclosure.
To qualify for relief under the VDP, a taxpayer must make a voluntary application that relates to a tax year at least one year past its filing due date and involves an error or omission with penalties or interest. The application must include all supporting documents, full disclosure for all relevant years, and timely responses to CRA requests. Any taxes owing must be paid or arrangements made for payment.
Voluntary applications may qualify as:
- Unprompted: filed before any CRA communication about a compliance issue, or after receiving only a general education letter or notice. Unprompted applications are normally eligible for general relief and will receive 75% relief of the applicable interest and 100% relief of the applicable penalties.
- Prompted: filed after the CRA (or another source) has identified a specific error or omission, set a deadline for correction, or obtained third-party information linking the taxpayer (or a related taxpayer) to non-compliance. Prompted applications are normally eligible for partial relief and will receive 25% relief of the applicable interest and up to 100% relief of the applicable penalties.
Pro tax tips –T106 Filing Requirement Determination can be Complex
The types of reportable transactions under T106 are broad and each transaction counts towards the one-million threshold. Therefore, it is highly recommended that taxpayers consult with an experienced Canadian tax lawyer regarding their obligation when they are involved in non-arm's length transactions with non-residents to avoid potential penalties. The VDP is the best solution for taxpayers who failed to file the T106 form on time.
FAQ:
What are reportable transactions per Form T106?
Under Form T106, reportable transactions are cross-border dealings between a Canadian reporting entity (corporation, trust, individual, or partnership) and a non-resident with whom the entity is not dealing at arm's length. These transactions must be reported if they exceed the applicable threshold (currently CAD $1,000,000 total, with individual de minimis thresholds of CAD $25,000 before 2022 and CAD $100,000 from 2022 onward).
The main types of reportable transactions include:
- Tangible property – Transfers, sales, or leases of physical goods.
- Intangible property – Intellectual property, patents, trademarks, copyrights, goodwill, etc.
- Rents and royalties – Payments for use of property, rights, or licenses.
- Services – Management fees, consulting, or other service transactions.
- Financial transactions – Loans, advances, interest, or other accounts receivable/payable, including beginning and ending balances and gross increases or decreases.
What are the penalties for failure to file T106?
Failure to file T106 will lead to a penalty of $25 per day for each day, with a maximum of $2,500 per year.
What is the VDP?
The Voluntary Disclosures Program (VDP) gives taxpayers the chance to come forward to the Canada Revenue Agency (CRA) to correct errors or omissions in their tax affairs. When accepted, the VDP may grant relief from penalties and some interest, as well as protection from criminal prosecution. However, taxpayers are still required to pay any taxes owing in full.