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December 11, 2020 Canada Revenue Agency releases preview of revised T1134 form Executive summary On 27 November 2020, the Canada Revenue Agency (CRA) released a preview of the revised Form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates, accompanied by a notice to tax professionals. While the revised form will be officially released and published on Canada.ca in January 2021 and is applicable to taxation years that begin after 2020, no actual legislative changes to section 233.4 of the Income Tax Act (the Act), the provision that establishes reporting requirements in respect of foreign affiliates, have been proposed to accompany such changes. The overhaul of the T1134 form thus stems from the CRA’s policy of reviewing and updating its forms and administrative guidelines to clarify and enhance compliance requirements. A copy of the draft revised form can be accessed here. Detailed discussion Background The 27 February 1995 federal budget proposed that Canadian individuals and corporations holding investments outside Canada be required to disclose additional information regarding their interests in such investments. In general terms, these requirements were intended to provide the CRA with sufficient information regarding offshore investment made by Canadian taxpayers to determine compliance with the Canadian taxation of foreign-based income and help ensure that Canadian taxpayers pay an appropriate amount of Canadian tax on income accruing with respect to their foreign holdings. The original T1134 form comprised two separate forms distinguishing between the reporting requirements in respect of controlled and non-controlled foreign affiliates (T1134A and T1134B). The current T1134 form combines the former T1134A and T1134B forms in a Summary form (the T1134 Summary) and Supplements (the T1134 Supplement(s)). The revised T1134 form that is due to be released in early 2021 will continue to include the T1134 Summary and the T1134 Supplements. It should be noted that taxpayers will also continue to have the option of e-filing the T1134 form. A reporting entity is generally required to file the foreign information return annually with respect to each of its foreign affiliates. The draft legislative proposals released on 27 July 2018 following the 2018 federal budget amended subsection 233.4(4) of the Act to shorten the T1134 filing deadline from 15 months after the end of the taxpayer’s taxation year (or fiscal period, if the reporting entity is a partnership) to:
The following provides an overview of the key changes to the reporting requirements currently applicable. The changes are described from the taxpayer’s point of view and grouped into three categories: relieving changes, additional disclosure requirements and additional challenges. Relieving changes
Additional disclosure requirements Additional information will need to be disclosed in relation to various rules enacted since the last major revision to the form. The following summarizes highlights of certain key additional disclosure requirements, many of which may significantly increase the time and effort that may be required on the part of each reporting entity to complete the T1134 forms:
Additional challenges More disclosure around the number of employees In Section 1 of Part III, the revised T1134 form now asks for more detail in respect of the number of full-time employees or employee equivalents (as defined in subparagraphs (c)(i) and (ii) of the “investment business” definition in subsection 95(1) of the Act) employed by the foreign affiliate throughout the year. While it no longer requires the breakdown of employees on a business-by-business basis, it now has four more categories, requiring selection of one of the following options: i. 0 employees ii. 1 to 5 employees iii. 6 to 15 employees iv. 16 to 25 employees v. 26 to 100 employees vi. 100+ employees There is also an additional question confirming whether the foreign affiliate or the partnership of which the foreign affiliate is a qualifying member relied on the services of the qualifying employer (i.e., a corporation related to the foreign affiliate, a designated corporation or a designated partnership). As the definition of “investment business” solely captures those businesses that do not have more than five employees, it is unclear what the relevance of having options for anything other than (i) fewer than five employees and (ii) more than five employees in this case. No other FAPI or surplus rules test the number of employees employed by the foreign affiliate. It is not clear how the CRA will view those taxpayers that select zero employees. If these foreign affiliates are automatically flagged, this could mean higher risk of audit for holding companies and those entities with a low number of employees. Which members of the “related Canadian group”? Practitioners/taxpayers will undoubtedly need to pay close attention to the disclosures for each of the members of the related group in each of the sections in the case of this elective group filing option, particularly as each reporting entity remains responsible for providing the correct information on, and timely filing of, each information return. Where the reporting entity is completing the revised form on behalf of a related Canadian group, additional information/disclosures are to be included:
Disclosures of details pertaining to complex transactions As described earlier, the revised form now requires disclosures of transactions to which various complex rules may apply, including the FAD rules, the upstream loan rules, tracking arrangement rules, and the various internal reorganization provisions. The complexity of the questions asked and the level of detail required will surely pose challenges for even the most experienced tax professionals and may make the automation of the preparation of certain sections of the form impractical. As noted above, any FAPI amounts and upstream loans that taxpayers have are now reportable on the revised form in significant detail. Where taxpayers have previously taken a practical approach and chosen to report only net FAPI or the upstream loan amounts not covered by various deductions under section 90 (e.g., the downstream surplus of underlying foreign affiliates), additional details will now be made available to the CRA, which may be used as part of their audit assessments related to prior years as well as future years. Filing deadline With the revised T1134 form and the added complexity and detailed information/disclosures required, taxpayers and tax practitioners will face significant challenges in compiling all of the necessary information in the already-shortened time frame. With the various COVID-19 relief programs provided by tax authorities in many foreign jurisdictions in the past year, this has meant many foreign tax filings were completed later than usual and may mean more delays for taxpayers and practitioners in gathering the requisite information for the FY2021 T1134 form filings. Implications As stated in the Notice to Tax Professionals, the purported objective of the proposed changes to the T1134 information return is to balance the CRA’s needs and requirements to use the T1134 for audit risk assessment purposes and to address taxpayers’ concerns on compliance burden. The changes to the T1134 form thus attempt to take into account the latest legislative amendments enacted in respect of the foreign affiliate regime and target areas that may be of particular audit concern for the CRA while also reducing redundant information. However, as outlined above, the changes appear to trend toward requiring greater disclosure of foreign affiliate information for the purposes of the CRA’s audit assessment requirements more so than they do toward reducing cost, time and efforts for taxpayers to comply. Additional information and disclosures in the revised T1134 form will require taxpayers to devote more resources to meeting their compliance obligations. _______________________________________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (Canada), Toronto
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