Unlock CRA Secrets: The Ultimate T1134 & T106 Guide to Avoid Fines and Maximize Your Tax Savings

If you’re a Canadian resident with foreign investments or doing business with related entities outside of Canada, you’re likely familiar with the Canada Revenue Agency’s (CRA) international reporting requirements. Among these are Form T1134 (Information Return Relating to Controlled and Non-Controlled Foreign Affiliates) and Form T106 (Information Return of Non-Arm’s Length Transactions with Non-Residents). These forms are critical for ensuring compliance with Canadian tax law and avoiding costly penalties. In this guide, we’ll walk you through what these forms are, who needs to file them, CRA’s rules, filing deadlines, penalties for late submission, and how to fill them out. Plus, we’ll share a detailed case study to tie everything together!

What is Form T1134?

Form T1134 is used to report a taxpayer’s interests in foreign affiliates. But what exactly qualifies as a foreign affiliate? A foreign affiliate is a non-resident corporation in which a Canadian taxpayer owns at least 1% of shares, and all Canadian residents together own at least 10% of the company’s shares.

Imagine you or your corporation holds a significant stake in a company based outside of Canada. If you meet the above thresholds, CRA expects you to report this ownership to ensure transparency and compliance with Canadian tax laws. CRA uses this information to assess whether the foreign affiliate’s income should be subject to Canadian tax, depending on the nature of its activities and the types of income it generates.

Who Needs to File Form T1134?

Whether you’re an individual, a corporation, a partnership, or a trust, if you have a significant ownership in a foreign affiliate, you’re required to file Form T1134. Here’s a breakdown of who needs to file:

1. Individuals: If you are a Canadian resident who owns at least 1% of shares in a foreign company, and together with related parties, your ownership equals 10% or more, you must file.
2. Corporations: Canadian companies that meet the same ownership criteria (1% individually, 10% combined) are required to file.
3. Partnerships and Trusts: If a Canadian partnership or trust holds a significant interest in a foreign affiliate, they too must file Form T1134.

Filing Deadline for T1134

For tax years starting after 2020, Form T1134 is due 12 months after the end of the taxpayer’s fiscal year. This extended deadline gives taxpayers time to collect the necessary information from foreign entities, which can sometimes be complex and time-consuming to gather.

Late Filing Penalties for T1134

The CRA takes late or missed filings seriously. If you fail to file on time, penalties start at $25 per day, up to a maximum of $2,500 per year, per foreign affiliate. If CRA determines that the failure to file was intentional or due to gross negligence, additional penalties can be levied.

What is Form T106?

Now, let’s talk about Form T106, which is used to report transactions between Canadian residents and related non-residents. If you’re engaging in transactions with a foreign entity that is related to you (such as a parent company, subsidiary, or another related party), you need to report these dealings to the CRA. The goal here is to ensure that cross-border transactions are conducted at arm’s length, meaning they reflect fair market value and aren’t used to shift profits or manipulate tax obligations.

Who Needs to File Form T106?

You must file Form T106 if:

• You are a Canadian taxpayer (individual, corporation, trust, or partnership).
• You have engaged in non-arm’s length transactions (e.g., with a related foreign entity).
• The total value of these transactions exceeds $1,000,000 (CAD) in a tax year.

Filing Deadline for T106

Form T106 is due six months after the end of your fiscal year. Much like T1134, failing to file on time can lead to penalties.

Late Filing Penalties for T106

The penalty for not filing Form T106 starts at $100, but if the delay continues or if the CRA views the omission as intentional, penalties can reach $2,500 or more depending on the severity of non-compliance.

How to Fill Out Form T1134

Filling out Form T1134 may seem intimidating, but here’s a step-by-step breakdown to make it easier:

1. Part I – Reporting Foreign Affiliates:
   • List all foreign affiliates in which you or your corporation has a significant interest (at least 1% individually, or 10% combined with related parties).
   • Include details about each foreign affiliate, including the country of incorporation, principal business, and your ownership percentage.
2. Part II – Income Statement:
   • Provide financial information about the foreign affiliate, such as its revenue, expenses, and net income.
   • Report any Foreign Accrual Property Income (FAPI), which refers to passive income earned by the affiliate.
3. Part III – Balance Sheet Information:
   • Complete the foreign affiliate’s balance sheet, detailing its assets, liabilities, and equity.
4. Schedule B (if applicable):
   • If you’ve received dividends, interest, royalties, or other passive income from the foreign affiliate, provide details here.

How to Fill Out Form T106

Form T106 is designed to capture details about cross-border transactions between related parties. Here’s how to fill it out:

1. Part I – Identification of Reporting Person:
   • Enter your (the Canadian taxpayer’s) name, address, and business number.
2. Part II – Non-Resident Information:
   • Provide the name, address, and jurisdiction of the related non-resident entity with whom you transacted.
3. Part III – Summary of Transactions:
   • Report all types of non-arm’s length transactions with the foreign entity, such as the sale of goods, loans, or services. Be sure to include the amount, type, and purpose of each transaction.
4. Part IV – Transfer Pricing Documentation:
   • Confirm whether the transactions were conducted according to CRA’s transfer pricing regulations, and whether documentation exists to support this.

Case Study: Filing T1134 and T106

Let’s look at an example to illustrate how these forms come into play:

Scenario:
Sarah is a Canadian resident who owns a Canadian corporation, MapleTech Ltd. MapleTech Ltd. owns 20% of a foreign corporation, TechGlobal Inc., based in the United States. Sarah also personally owns 5% of TechGlobal Inc. Additionally, MapleTech Ltd. has conducted $2 million CAD worth of non-arm’s length transactions with another related entity, InnovateTech LLC, which is also based in the U.S.

Filing Requirements:

• T1134 for Sarah: Since Sarah’s combined ownership in TechGlobal Inc. (5% personally + 20% through MapleTech Ltd.) exceeds 10%, she is required to file Form T1134 to report her interest in TechGlobal Inc. She’ll need to include financial and balance sheet details for TechGlobal Inc., as well as any income generated by the foreign affiliate.
• T106 for MapleTech Ltd.: MapleTech Ltd. engaged in $2 million CAD worth of non-arm’s length transactions with InnovateTech LLC, so it must file Form T106. MapleTech Ltd. will report the nature and amount of these transactions, ensuring compliance with CRA’s transfer pricing rules.

Conclusion

Whether you’re a Canadian individual or business with foreign interests or cross-border transactions, understanding your obligations when it comes to filing Forms T1134 and T106 is critical. These forms help the CRA ensure transparency in international dealings and prevent tax avoidance. The penalties for non-compliance are steep, so timely and accurate filing is key to staying in CRA’s good books. When in doubt, it’s always a good idea to consult with a tax professional to make sure you’re meeting all your international tax obligations.