Tax Insights: Revised T1134 form coming in 2021 ─ are you ready?

Issue 2020-45

In brief

The Canada Revenue Agency (CRA) will release a revised T1134 form in January 2021. The revised form requires a more comprehensive disclosure of information and events within the group of foreign affiliates. It takes into account the legislative amendments enacted after the last major revision to the form in 2012, and addresses the CRA’s critical business needs and some of the tax community’s concerns on compliance.

To help taxpayers prepare for, and comply with, the increased disclosure requirements, the CRA has released a preview of the revised T1134 form. This new version of form T1134 will be effective for taxation years or fiscal periods that begin after 2020, and must be filed within 10 months after the year end. For taxation years or fiscal periods that begin in 2020, the old T1134 form will continue to be used and must be filed within 12 months after the year end.

This Tax Insights highlights the key changes to the T1134 form.

In detail

Background

Form T1134, “Information Return Relating to Controlled and Non-Controlled Foreign Affiliates” must be filed by all Canadian resident taxpayers (corporations, individuals and trusts), and partnerships¹ for any year in which the taxpayer or partnership has an interest in a controlled or non-controlled foreign affiliate, at any time in the year. The T1134 information return contains a summary form and a supplement. A separate T1134 supplement is filed for each foreign affiliate.

A “foreign affiliate” is a non-resident corporation in which the taxpayer owns, directly or indirectly, at least 1% of any class of the outstanding shares of the foreign corporation, and the taxpayer, alone or together with related persons, owns, directly or indirectly, at least 10% of any class of the outstanding shares of that foreign corporation. The foreign affiliate will be a controlled foreign affiliate if certain conditions are met (e.g. more than 50% of the voting shares are owned, directly or indirectly, by a combination of the Canadian taxpayer, persons dealing at non-arm’s length with the Canadian taxpayer, a limited number of Canadian resident shareholders, and persons dealing at non-arm’s length with these Canadian resident shareholders).

Additional reporting requirements in the revised T1134 form (for taxation years beginning after 2020)

The revised T1134 form introduces additional reporting requirements on taxpayers, including:

• additional questions on the T1134 summary:
  • related to the activity of the reporting entity, focusing on reorganization transactions undertaken by the reporting entity
  • for lower-tier non-controlled foreign affiliates that are held indirectly through other non-controlled foreign affiliates, focusing on transactions and events that affect surplus account balances (no disclosure was required for these lower-tier foreign affiliates in the old T1134 form)
• new specific questions on:
  • the reporting entities’ involvement in transactions and arrangements relating to legislative amendments enacted since 2012 (e.g. upstream loan rules, foreign affiliate dumping, tracking interests, and pertinent loan or indebtedness elections)
  • elections filed in respect of dividends from foreign affiliates to the reporting entity, or any member of the related Canadian group
• a requirement for:
  • each foreign affiliate to provide the breakdown of their gross revenue, including whether the source was arm’s length or non-arm’s length
  • reporting entities to provide the adjusted cost base (ACB) of the foreign affiliates’ shares they own directly (by common and preferred shares) and identify any changes during the year
• additional questions that identify whether foreign accrual property losses (FAPL) and/or foreign accrual capital losses (FACL) have been carried over to reduce the amount of foreign accrual property income (FAPI) reported; the amount of any FAPL or FACL must also be reported
• new questions that identify reorganizations undertaken by the foreign affiliate, including liquidations, mergers, share-for-share exchanges and transactions involving convertible property

Relieving measures in the revised T1134 form (for taxation years beginning after 2020)

The revised T1134 form also introduces relieving measures designed to reduce the compliance burden on taxpayers. The relieving measures include:

• introducing a joint filing option for a group of reporting entities that are:
  • related to each other
  • have the same year end, and
  • report in Canadian dollars or in the same functional currency,

thereby allowing reporting entities to jointly file one set of T1134 summary and supplements for all foreign affiliates that any one of its members would have otherwise been required to file

• easing the criteria to be exempt from filing the T1134 supplement for a “dormant” or “inactive” foreign affiliate by:
  • increasing the total gross receipts threshold for determining the dormancy status of a foreign affiliate to C$100,000 (from C$25,000), and
  • applying the exemption criteria only at the individual legal entity level
• requiring reporting entities to only provide unconsolidated financial statements for each foreign affiliate in which the reporting entity holds at least 20% of the voting shares (instead of for all foreign affiliates of the reporting entity)
• removing from the old T1134 form, the three financial data fields in Part II – Section 3 (total assets, accounting net income before tax, income or profits tax paid or payable on income) and the reporting entity information in Part II – Section 1
• allowing reporting entities to submit their organizational chart electronically in a pictorial format (instead of completing the relevant tables in the form)
• permitting reporting entities to disclose the total number of employees each controlled foreign affiliate employs throughout the year on a foreign affiliate-by-foreign affiliate basis and no longer requiring this information on a business-by-business basis where a foreign affiliate carries on multiple separate businesses
• requiring reporting entities to complete the questions on the gross amount of debt owing to or from the foreign affiliate only if the information was not otherwise reported on the reporting entity’s T106 form

The takeaway

Taxpayers who have foreign affiliates should review the new version of the T1134 form to be aware of, and prepare for, the additional information that will be required to complete the form for taxation years or fiscal periods beginning after 2020.

To prepare for the new version of the T1134 form, taxpayers should update their surplus and ACB calculations for their foreign affiliates and implement processes to identify and flag the various transactions that must be reported on the new T1134 form. All the new required information will also need to be gathered in time to meet the earlier filing deadline that applies for taxation years or fiscal periods beginning after 2020, which is 10 months after year end; this is two months earlier than the filing deadline for the previous taxation year.

PwC can help you:

• understand the changes made to the T1134 form and the additional information that your business must gather to complete the form
• determine whether your group of companies is eligible for, and it is beneficial to file, the joint filing option
• ascertain if your company qualifies for an exemption from filing the T1134 supplement for certain foreign affiliates, and other changes to the form that relax compliance requirements
• update the surplus and ACB calculations for your foreign affiliates

^{1. The T1134 information return is only required for partnerships if the share of the income or loss of the partnership for the year of non-resident members is less than 90% of the income or loss of the partnership, and a non-resident corporation or trust would be a foreign affiliate of the partnership if the partnership were a person resident in Canada.}