While the legislation governing Form T1134 remains unchanged, many taxpayers continue to rely on the voluntary disclosures program or other remedial measures for penalty relief. Rather than retroactively correcting errors, taxpayers should consider the following practical tips to adopt a more proactive approach to T1134 reporting.
Form T1134 is designed to improve transparency in reporting of foreign investments through foreign affiliates (FA) and/or controlled foreign affiliates (CFA) owned by Canadian residents. However, the reporting obligations are complex and can be easy to miss. While taxpayers may turn to, for example, the voluntary disclosures program (VDP) to seek penalty relief from erroneous or missed Form T1134s, the process can be time-consuming and costly, and relief is subject to the Minister of Finance’s discretion.
Instead of relying on remedial measures, taxpayers should take proactive steps to meet filing obligations. This article summarizes some of the requirements and pitfalls to consider with Form T1134 reporting. However, given the complexity of these rules, seeking professional advice from international tax advisors is strongly recommended.
Here’s a look at the requirements, along with tips and tricks to watch out for ahead of the upcoming Oct. 31 filing deadline.
A Form T1134 is generally required to be filed by Canadian resident taxpayers or certain partnerships that own shares of an FA. It is due 10 months after the taxpayer or partnership’s year end, which is fast approaching for entities with a Dec. 31 year-end.
The form consists of a summary and supplements, with a separate supplement required for each non-resident corporation or trust that is either an FA or CFA.
The objective of these forms is to gather information from Canadian investments in foreign entities, including:
Undoubtedly, these forms are complex and require detailed documentation to ensure accurate and timely filing. If taxpayers miss their obligation, there is a penalty of $25 per day for each non-compliance, with a minimum of $100 and maximum of $2,500 per non-compliance. For entities with several FAs or CFAs, these penalties can accumulate quickly and the VDP is often the only relief. However, rather than relying on relief provisions under the Income Tax Act, advanced planning is the best way for taxpayers to avoid penalties and complications associated with VDP filings or other remedial measures.
While Form T1134 is a critical foreign compliance requirement, navigating its complexities can be challenging. Below are common pitfalls that taxpayers should be mindful of to ensure accurate reporting and avoid financial repercussions.
Partnerships can hold interests in FAs and CFAs. However, like the rules governing FAs and CFAs, the partnership rules are complex and can be difficult to interpret—especially considering how distribution of income would be taxed.
For example, where an FA pays a dividend to a partnership, the dividend is then allocated to each partner in accordance with the partnership agreement. However, the FA rules deem the income allocation to be based on the pro rata fair market value (FMV) of the member’s partnership interest, and a deduction is limited to that same amount. Where the allocation percentage under the partnership agreement and the FMV of the partnership interest differ, the dividend deduction may not provide sufficient tax shelter. To avoid misreporting, seeking professional advice is the best path forward to help navigate the overlapping legislation.
Form T1134 requires CFAs to report all dispositions of shares of another FA or partnership that are excluded property and other non-excluded capital property. Excluded property may not trigger immediate Canadian tax consequences for the CFA and can potentially be repatriated to Canada on a tax-free basis. Although excluded property can also be held by an FA, the above relief is not applicable, as the FAPI earned is not taxed on an accrual basis. Instead, it impacts the allocation of the income or gain to the surplus balances. To qualify, the property must generally meet one of these three requirements:
To prevent mischaracterization, it is essential to clearly document the property’s purpose and confirm whether it meets the relevant criteria. Otherwise, dispositions by a CFA may be taxed in Canada on an accrual basis.
When an entity qualifies as a lower tier non-CFA, administrative relief is available, as a separate T1134 slip is not required. Instead, only a T1134 summary is needed. An FA is considered a lower-tier non-CFA if the FA is held indirectly through a non-CFA. However, this exemption can become complex when ownership percentages change, as an entity may meet this exemption at one point but lose eligibility later. To avoid overreporting or underreporting, it is important to regularly review ownership percentages. Past eligibility does not guarantee applicability in the current reporting year.
Where an FA is determined to be dormant or inactive, some relief is available, as separate supplements are not required and only a T1134 summary is needed. However, specific criteria must be met annually to qualify for this exemption. These include:
To prevent misclassification, taxpayers should be prudent to maintain thorough documentation of these amounts. Notably, gross receipts are not limited to just income or revenue, but can include shareholder loans, capital contribution, third party loans and other inflows.
During the restructuring of corporate groups, by mergers or acquisitions, companies (i.e., AcquireCo or MergerCo) are often incorporated temporarily and subsequently dissolved. Due to their short existence, these entities are often overlooked in Form T1134 reporting, even though they may qualify as an FA or CFA during that time. It is crucial that the implication of the FA and CFA rules are considered when planning restructuring events. Proper documentation and planning are needed to ensure compliance with T1134 obligations post implementation, if applicable.
Taxpayers may consider use of the VDP to correct past omissions or errors related to T1134 reporting. The VDP is the Canada Revenue Agency’s (CRA) relief program that may waive all or part of the applicable penalties and some of the interest.
While the program can be a resource, it presents its own challenges. The application process is both costly and time consuming, with long wait times for responses from the CRA. Further, outcomes are not always favourable as they are based on the Minster of Finance’s discretion.
Despite best efforts, taxpayers with past non-compliance may benefit from leveraging the VDP. Effective Oct. 1, 2025, the CRA recently announced changes to the VDP, such as increased eligibility, new interest and penalty relief, and a simplified application form. The CRA also included clarification on what documents must be included in the application; for T1134 reporting, where non-compliance spans over multiple years, documents for foreign-source income or assets should be from the most recent 10 years. Although dependence on the VDP is not recommended, these updates may offer a more practical resolution for those addressing prior T1134 non-compliance.
Given the complexities in T1134 reporting, detailed and thorough analysis and documentation are essential for timely and accurate filing. Proactive compliance from the outset will minimize the need for corrective action and reliance on relief programs.
