The revised T1134 form

The revised T1134 Information Return Relating to Controlled and Non-Controlled Foreign Affiliates was officially released in February 2021. It includes additional questions and more detailed disclosure with a goal of clarifying and enhancing compliance requirements.

Background

Form T1134 is generally required to be filed annually by a reporting entity (Canadian resident individual, corporation, certain partnerships and trusts) that owns shares in a foreign affiliate at any time during the year. The original due date of this form was 15 months following the end of the taxpayer’s year-end. Recent legislative changes have accelerated this due date for taxation years beginning after 2019. For taxation years beginning in 2020, the form must be filed within 12 months, but that period is reduced to 10 months for taxation years beginning after 2020. This revised T1134 form is to be used for taxation years beginning after 2020 only, while any taxation years beginning prior to 2021 must continue to use the 2012/2017 version of the form. There are substantial penalties for failing to complete and file this return accurately before the relevant deadline.

What’s new with the 2021 version of Form T1134?

Applicable for taxation years beginning after 2020, the revised form introduces several changes to the required information, the detailed description of which can be found on the form. Some of the key changes are highlighted in the following paragraphs and are grouped into relieving measures and additional disclosure requirements, both in the T1134 Summary and the T1134 Supplement Forms.

Relieving measures

The revised Form T1134 includes some changes that would reduce the compliance burden on some taxpayers, notably:

Joint filing option – A group of reporting entities can jointly agree to file one set of T1134 Summary and T1134 Supplements as long as they are related to each other, have the same taxation year-end and report in Canadian dollars or in the same functional currency. However, while a group of related entities has the option to file one set of T1134 forms, penalties for non-filing will apply to each reporting entity as if that entity filed the returns on its own.

Organizational chart – Instead of completing the tables in Section 3, Part C of the T1134 Summary, reporting entities now have the option to attach a group organizational chart, as long as it includes all requested information.

Exemption from filing a T1134 supplement for dormant or inactive foreign affiliate – Dormant or inactive foreign affiliates are exempted from filing a T1134 Supplement if the total cost amount to the reporting entity at any time in the year of the interest in that foreign affiliate was less than CAD $100,000. The criteria is applied at the individual legal entity level (for taxation years beginning before 2021, this $100,000 threshold was applied to the aggregate of all interest in foreign affiliates held by the reporting entity). Foreign affiliates also have to meet specific criteria to be considered dormant or inactive:

• Gross receipts (including proceeds from the disposition of property) of less than CAD $100,000 in the year (for taxation years beginning before 2021, the threshold is $25,000), and
• Total fair market value of assets could not exceed CAD $1,000,000 any time during the year.

If a T1134 Supplement is not completed for a dormant/inactive foreign affiliate, the revised form still requires information such as the total cost amount, gross receipts, gross revenue and the nature of assets held by the foreign affiliates to be reported.

Unconsolidated financial statements for foreign affiliates – A reporting entity only needs to provide unconsolidated financial statements of each foreign affiliate in which it holds at least a 20 per cent voting right (for taxation years beginning before 2021, it is required for all foreign affiliates).

Additional disclosure requirements

T1134 Summary

Reorganization transactions at Canadian level – Any reorganization transactions undertaken by the reporting entity during the year (such as tax-free rollovers, amalgamations or wind-ups) must be indicated on the form.

Lower-tier, non-controlled foreign affiliates – The revised form has a new table that requires additional information on events and transactions that affect the surplus account balances of lower-tier, non-controlled foreign affiliates held indirectly through other non-controlled foreign affiliates. However, a separate T1134 Supplement is not required to be filed for these lower-tier, non-controlled foreign affiliates.

T1134 Supplement

Capital stock of foreign affiliates – Reporting entities need to indicate if they have direct or indirect ownership in the foreign affiliate. If they directly own shares in the foreign affiliate, they are required to provide a breakdown of and changes to the adjusted cost base (ACB) of the foreign affiliate’s common shares and preferred shares directly owned during the year.

Foreign affiliate dumping (FAD) rules – Reporting entities are required to indicate whether they were involved in transactions where the FAD rules apply, as well as whether a pertinent loan or indebtedness (PLOI) election under subsection 212.3(11) was made.

Surplus account – The surplus accounts section currently requires details on all dividends received by the reporting entity and the surplus accounts from which it was paid. The revised T1134 has been expanded to require such disclosure for any member of the related Canadian group that hold shares of the foreign affiliate, as well as to report the total dividends paid by the foreign affiliate.

In addition, the narrative description for surplus accounts and share transactions was converted to yes/no questions about the transactions undertaken by the foreign affiliate relating to liquidations and dissolutions, convertible property exchanges or reorganization transactions, where foreign accrual property income (FAPI) rules may apply.

Furthermore, reporting entities also need to disclose any loans made by the foreign affiliate that could be subject to the upstream loan rules.

Composition of revenue – Foreign affiliates’ gross revenue needs to be broken down between arm’s length and non-arm’s length sources. If no breakdown is provided, 100 per cent of the amount reported in the “Total gross revenue” column will be considered non-arm’s length source income.

Foreign accrual property income (FAPI) or foreign accrual property loss (FAPL) and foreign accrual capital loss (FACL) – The revised T1134 Supplement requires much more disclosure with regards to FAPI for the year, even if net FAPI is nil, as well as FAPL and FACL. These additional questions aim to identify whether any amount of FAPL and/or FACL were carried forward to reduce the amount of FAPI reported for the year. The amounts of FAPL or FACL must also be reported.

Next steps

Given the increase in disclosure requirements and the earlier filing deadline, taxpayers should start gathering all new required information and updating their surplus and ACB calculations for their foreign affiliates. For additional information, please contact your Baker Tilly advisor.