T1134: An overdue update on foreign affiliate information reporting
INSIGHT ARTICLE |
On Feb. 3, 2021, the CRA released an updated version of form T1134. The revised form will be used for reporting entities’ taxation years that begin in 2021 or later and is due 10 months after the end of the taxation year.
This long-overdue revision significantly expands the scope of reporting. Its apparent goal is to capture the legislative amendments made since the last major revision to the form in 2012 and thereby support the government’s commitment to combatting international tax evasion and aggressive tax planning.
The previous version of the form was out of date almost from the time it was issued. In the 2012 budget, the minister of finance tried to close certain loopholes in the Canadian foreign affiliate (FA) regime by introducing (among other things) upstream loan rules, stub-period foreign accrual property income (FAPI) rules, foreign affiliate dumping rules, and tracking interest rules. Further, numerous updates were made to the existing rules, such as FA reorganizational rules and loss streaming to align with domestic rules.
The changes to the form are extensive and require substantial additional reporting. However, this additional reporting reflects information that should already be analyzed and quantified for the reporting entities’ Canadian income tax returns, which are due much earlier than form T1134. As a result, taxpayers that are fully compliant with current rules may not find the revisions very onerous. Still, taxpayers should bolster their internal analysis and documentation procedures to prepare for the upcoming FA reporting season.
One example of the required changes in reporting is that under the old form, if a controlled foreign affiliate (CFA) was in an overall loss position or there was a sufficient loss carryforward balance, some taxpayers did not perform a full FAPI analysis and simply reported nil FAPI. Such shortcutting of the analysis was technically inconsistent with FA regime rules that require taxpayers to maintain accurate and up-to-date FAPI balances. However, this type of reporting was possible because foreign accrual property losses (FAPLs) and foreign accrual capital losses (FACLs) were not required to be disclosed. The new form requires disclosure of the amount of FAPLs or FACLs incurred by the CFA during the current taxation year, as well as whether any losses were carried forward and back. As a result, the former simplified approach will no longer work. The new form compels taxpayers to perform full due diligence of their CFAs’ activities.
In addition, the new form requires additional reporting on whether upstream loan rules apply and, if so, whether any surplus balances were used to offset the income inclusion. The CRA has always emphasized the requirement to maintain current surplus calculations to support any deductions claimed by Canadian corporations. However, these upstream loan and offset calculations were not required to be filed with the form; thus, the CRA did not have clear oversight on the use of the balances for different purposes unless it performed a full audit.
The revised form also better acknowledges the complicated web of FA rollover rules. Instead of simply asking for descriptions of the reorganization transactions undertaken by the reporting entities and/or the CFAs, the new form requires the disclosure of any specific tax-deferred provisions applicable to the transactions. This appears to require taxpayers to perform a full analysis of the tax implications of any offshore transactions carried out. Taxpayers cannot continue to rely on the tax-deferred provisions without proper documentation.