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Understanding the U.S. Equivalent to Canada's T106
In Canada, taxpayers must file CRA Form T106 to disclose certain non-arm's length transactions with non-residents. The United States does not have a single consolidated disclosure form equivalent to T106. Instead, the Internal Revenue Service (IRS) requires multiple different filings depending on the type of foreign relationship or transaction. U.S. taxpayers with international dealings must navigate a complex compliance landscape for offshore income tax reporting involving Form 5471, Form 5472, and Form 8865, among others.
Failing to comply with these requirements can trigger steep penalties, making it essential for U.S. taxpayers with cross-border operations to understand their obligations.
Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations
Form 5471 is one of the most frequently required filings for U.S. persons with foreign interests. It applies to U.S. citizens, residents, and domestic corporations that are officers, directors, or shareholders in certain foreign corporations.
This form requires taxpayers to disclose extensive information about the foreign corporation, including:
- Ownership structure and shareholding details
- Financial statements and earnings
- Intercompany transactions between the foreign entity and related U.S. persons
The IRS uses this information to monitor whether U.S. persons are properly reporting income earned through foreign corporations and to enforce international tax rules under the Internal Revenue Code.
Penalties: Failure to file Form 5471 can result in a $10,000 penalty per form, per year, with additional penalties if the failure continues after IRS notification.
Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
Form 5472 is the closest U.S. equivalent to Canada's T106. It specifically reports reportable transactions between a U.S. corporation that is at least 25% foreign-owned and related foreign parties.
Reportable transactions can include:
- Sales, purchases, or transfers of inventory and property
- Loans, interest, or other financing arrangements
- Use of intangible property such as patents, trademarks, or goodwill
- Service fees and management charges
This form is critical for the IRS to assess whether transactions between related parties follow U.S. transfer pricing rules under IRC §482.
Penalties: The penalty for failing to file Form 5472 or maintain adequate records starts at $25,000 per year. Continued noncompliance can lead to an additional $25,000 penalty for each month the failure persists.
Form 8865: Return of U.S. Persons With Respect to Certain Foreign Partnerships
When a U.S. taxpayer has interests in foreign partnerships, Form 8865 may be required. Similar in purpose to Form 5471, it requires disclosure of:
- Ownership and capital contributions
- Income, expenses, and distributions
- Transactions between the partnership and related parties
The form ensures the IRS has visibility into cross-border partnership structures and their related-party dealings.
Penalties: Non-filing penalties start at $10,000 per year per form, with further penalties if the delinquency continues.
Other Related Filings
In addition to these primary forms, other filings may apply depending on the structure and nature of the taxpayer's foreign relationships:
- Form 8858: For U.S. persons with interests in foreign disregarded entities.
- Schedule UTP: For corporations reporting uncertain tax positions, including transfer pricing issues.
While these are not direct equivalents of T106, they illustrate the fragmented nature of U.S. international reporting obligations.
Why the U.S. Takes a Fragmented Approach
Unlike Canada's centralized reporting on Form T106, the United States relies on different forms based on the type of foreign entity. This reflects the complexity of U.S. international tax law, particularly after the Tax Cuts and Jobs Act (TCJA) introduced new anti-base erosion and controlled foreign corporation (CFC) rules.
From the IRS perspective, maintaining separate forms for corporations, partnerships, and disregarded entities provides more targeted information. For taxpayers, however, this increases the risk of missing a filing obligation and incurring penalties.
Pro Tax Tips
- Know your ownership thresholds: Many U.S. reporting requirements apply once ownership or control exceeds a set percentage (often 10% or 25%). Carefully review whether you meet the threshold.
- Don't assume one form is enough: You may be required to file multiple international reporting forms for the same entity depending on its structure.
- Maintain detailed records: The IRS expects robust transfer pricing documentation and intercompany agreements to back up disclosures.
- Consider voluntary disclosure: If you discover past noncompliance, the IRS has voluntary disclosure and streamlined procedures that can mitigate penalties.
- Seek professional guidance: Given the penalties, engaging an experienced U.S. tax lawyer or advisor is essential for compliance.
Frequently Asked Questions
Is Form 5472 the U.S. version of Canada's T106?
Form 5472 is the closest equivalent, since it requires disclosure of related-party transactions between U.S. corporations and foreign affiliates. However, unlike T106, the U.S. system also requires additional filings such as Forms 5471 and 8865 depending on the entity type.
Who has to file Form 5471?
Any U.S. person who is an officer, director, or shareholder of certain foreign corporations may need to file. The filing obligations are detailed and depend on ownership thresholds.
What happens if I don't file Form 5472?
Penalties start at $25,000 and can accumulate for each month of continued noncompliance. Non-filing also increases IRS tax audit risk.
Do individuals ever have to file Form 5472?
Generally, Form 5472 applies to corporations, but U.S. individuals who own foreign corporations may be indirectly impacted and required to file Form 5471 instead.
Is there one form that covers all foreign transactions?
No. Unlike Canada's centralized T106, U.S. taxpayers must determine which forms apply to them based on their specific ownership and entity structure.
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.
