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Revised form T1134 coming in January 2021

Dec 15,2020 Leave a comment By Segal GCSE LLP

The Canada Revenue Agency (CRA) will release a revised version of the form T1134, Information Return Relating to Controlled and Non-Controlled Foreign Affiliates, in January 2021. The revised form will require taxpayers to furnish detailed information and events within the group of foreign affiliates. The revised form T1134 will take into consideration the last legislative amendment made in the year 2012 as well as address the CRA’s crucial business requirements and some of the concerns brought forward by the tax community on compliance.

In order to allow for taxpayers to be prepared for the changes, the CRA has released a preview of the revised form. The new version of the form T1134 will be effective for taxation years or fiscal periods that begin after 2020 and must be filed no later than 10 months from the taxpayers’ year-end. For taxation years or fiscal periods that begin in 2020, the old form T1134 will continue to be used and must be filed no later than 12 months from the taxpayers’ year-end.

Highlights of the key changes to the form T1134 are discussed below.

Background

The form T1134 is required to be filed by Canadian resident taxpayers including corporations, individuals, trusts, and certain partnerships[1], for any year in which the taxpayer has an interest in a controlled or non-controlled foreign affiliate, in the year. The form T1134 contains a summary form and a supplement form that is filed separately 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).

New reporting requirements and questions in revised form T1134 for taxation years beginning after 2020

Changes in the new form T1134	What are the additional reporting requirements?
Summary	Activity(s) of the reporting entity specifically focusing on reorganization transactions undertaken by such reporting entity. Surplus account balances – for low tiered foreign affiliates that are held indirectly through other non-controlled foreign affiliates, focusing on transactions and events that affect surplus account balances (not required in existing form T1134).
New questions pertaining to	The reporting entity’s role in transactions and arrangements in the context of legislative amendments enacted since 2012, including upstream loan rules, foreign affiliate dumping, tracking interests, and pertinent loan or indebtedness elections. Elections made in the context of foreign affiliate dividends to the reporting entity or any other affiliate company of the Canadian group.
New requirements for	Breakdown of the gross revenue of each foreign affiliate, including if the source was arm’s length or non-arm’s length. The adjusted cost base of the foreign affiliate’s shares that the reporting entity owns directly (by way of common and preferred shares) and details of any changes that took place during the year.
Carry forward losses and FAPI	Details that will help determine if amounts were carried forward (such as foreign accrual property losses [FAPL] and/or foreign accrual capital losses [FACL]) to reduce the amount of foreign accrual property income (FAPI) reported for the year. Additionally, FAPL and FACL amounts will require to be reported.
Questions on foreign affiliate reorganization(s)	Details of reorganizations undertaken by the foreign affiliate, including liquidations, mergers, share for share exchanges, and convertible property transactions.

Measures to ease the burden of compliance

The revised form T1134 includes several changes that have been welcomed as a means of reducing the compliance burden on taxpayers. These include:

Joint filing option for a group of reporting entities that meet the following conditions:
- are related to each other
- have the same year-end
- report in Canadian dollars or an equivalent functional currency

This will allow reporting entities to jointly file one set of T1134 summary and supplements for all foreign affiliates.

Exemptions from filing the form T1134
- the threshold of total gross receipts increased to $100,000 (from $25,000) to determine the status (e.g., dormant or inactive) of a foreign affiliate.
- exemption criteria only applied to the individual entity.
Unconsolidated financial statements for foreign affiliates
- Reporting entities to only provide unconsolidated financial statements of each foreign affiliate in which it holds at least 20% of the voting shares and not for all foreign affiliates.
Removal of financial data fields from existing form T1134
- The new form T1134 removes existing disclosures under Part II – Section 3 that discloses total assets, accounting net income before tax, income tax paid or payable, as well as reporting entity information in Part II – Section 1.
Organization chart
- Reporting entities can file their organization chart electronically and will not be required to complete it in a tabular format.
Number of employees
- Reporting entities to disclose the total number of employees employed throughout the year by each foreign affiliate on an entity-specific basis instead of a business segment basis (where a foreign affiliate engages in multiple businesses).
Debt owing to or from foreign affiliates
- Where a reporting entity has not disclosed the gross amount, it is owed from or owes to a foreign affiliate in its form T106, it discloses such information in the new form T1134 by answering a series of questions.

What should taxpayers do to prepare?

The CRA’s introduction of revised form T1134 requiring comprehensive information on foreign affiliates is aligned with the global trend in tax authorities developing and implementing mechanisms to enable enhanced tax transparency. These initiatives follow the launch of the Base Erosion Profit Shifting (BEPS) project by the Organization for Economic Cooperation and Development (OECD). While it will be critical that taxpayers have systems and procedures to gather and furnish this information, this might be an appropriate opportunity to rely on the data-gathering exercise to rationalize corporate structures and identify any risks/gaps that might exist in the value-chain and develop strategies to mitigate them.

With the new form T1134 being introduced in January 2021, taxpayers should ensure the information on surplus calculations and adjusted cost base of foreign affiliate shares are up to date. Considering the new reporting requirements and a shorter deadline to file (10 months) the new form T1134, taxpayers should also consider how such additional information will be gathered specifically covering details in the context of upstream loans, foreign affiliate dumping, and elections made.

Furthermore, for Canadian headquartered multinational groups that meet the consolidated threshold of EUR 750 million requirement to file a Country-by-Country Report (CbC), it will be important that some of the information disclosed on related party foreign affiliates in the new form T1134, be consistent with the CbC Report, where appropriate. Furthermore, taxpayers implementing processes and procedures to gather information to include in the CbC Report should evaluate changes required to their systems to integrate the form T1134 reporting requirements and leverage efficiencies.

How Segal GCSE LLP can help?

Our multi-disciplinary tax and transfer pricing teams can assist taxpayers with complex reporting requirements and use such information to manage potential risks identified. This information can be used to determine completeness and accuracy by simulating it in advanced analytical tools and the outcomes can then be “risk classified” in the context of an ever-evolving international tax and transfer pricing environment.

For more details on how we can help, contact one of our Tax Partners Andrew Shalit, Howard Wasserman, Dora Mariani, or Principal & Transfer Pricing Leader Avinash S. Tukrel.

[1] 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

OECD BEPS 2.0 – Pillar One & Pillar Two Blueprints Released

Oct 14,2020 Leave a comment By Segal GCSE LLP

Summary:

The Pillar One and Two blueprints (BEPS 2.0) following a meeting of the OECD-led coalition of 137 countries, were released yesterday.

Contrary to expectations, there was no agreement on either blueprint by the Inclusive Framework members and it is now expected that consensus could be achieved by mid-2021.

Highlights:

The Blueprint documents are fairly consistent with previous communication from the OECD and demonstrate an evolution of the Unified Approach proposals from last October. In summary:

Pillar One continues to advocate the creation of a new taxing right and new nexus rules that move away from the traditional “physical presence” requirements; and
Pillar Two proposes the introduction of a global minimum tax and rules, to minimize global tax competition.

From a Pillar One perspective, countries are yet to agree on the scope, Amount A, and whether, as proposed by the United States, Pillar One reform should be made optional for multinationals. Also unresolved is the issue of how much profit is considered residual profit and what percentage would be reallocated. For Amount A, there is general agreement on the need for a new taxing right that is not based on physical presence and on a solution anchored on a net basis tax that uses a formulaic approach for the allocation of profits for business within the scope of Pillar One.

There is a general agreement that any solution will have to use thresholds, that consolidated financial accounts should be used as the starting point with limited book to tax adjustments, and that losses are taken into account (although this requires to be refined). There is also general agreement that segmentation is required to determine the tax base along with a broad safe harbor or exemption rules to reduce complexity.

There is a commitment to make sure that double tax is eliminated in a multilateral setting. Countries want to make progress on determining Amount B to simplify transfer pricing calculations for baseline marketing and distribution activities. A solution for Pillar One would include a new multilateral tax certainty process. For Amount A, a multilateral convention would be developed to implement the solution.

From a Pillar Two perspective, while a number of elements have been broadly agreed to, a “subject to tax rule” will have to be included for it to have a political agreement and reach global consensus.

The report provides an “impact assessment” although not for each country. Some key highlights:

The overall impact is likely to boost global corporate income tax revenues by up to 4% ($100 billion), with global gains expected to be derived primarily from the implementation of Pillar Two.
Pillar One is expected to result in a further reallocation of $100 billion to market jurisdictions (which, for some business models, are the jurisdictions where the users are located) which is likely to result in a modest increase in global tax revenues.
The impact assessment goes on to further clarify that the proposals will predominantly impact taxpayers that are high-profitable multi-national enterprises (“MNEs”) that are digitalized and use significant intangibles in the case of Pillar One, and MNE’s engaging in profit shifting in the case of Pillar Two.

Next steps:

The Blueprint documents are scheduled to be discussed at the G20 Finance Ministers and Central Bank Governors meeting on October 14, and a public consultation process has begun inviting stakeholder feedback and open until December 14, 2020.

Multinational Groups should actively continue monitoring progress leading up to countries arriving at a consensus and contribute to the consultation process that closes at the end of this year. Businesses with a digital footprint that heavily rely on intangibles, should model the impact of these proposals. Furthermore, businesses that have continued to retain traditional tax structures and/or that rely on traditional physical presence requirements, should review such arrangements

A copy of the report released by the OECD can be viewed here: https://www.oecd.org/tax/beps/tax-challenges-arising-from-digitalisation-report-on-pillar-one-blueprint-beba0634-en.htm

If you’d like to know more or how this might be relevant to your global business and inter-company arrangements, contact our Transfer Pricing Leader, Avinash S. Tukrel.