Under the Canadian Income Tax Act, if you are Canadian residents, you are obligated for income taxes on the worldwide income that you received.
What if I own a company outside of Canada?
If there is no income distributed back to you or there is no disposition of ownership or other transaction triggered income taxes, then you don’t owe any tax to the CRA. However, filing From T1134 to the CRA cannot be ignored as the consequence is significant.
So, what is T1134?
T1134 along with T1135 and other forms are used by the CRA to monitor international investment and business activities associated with Canadian residents. So, T1134 focuses on the active foreign affiliates of the taxpayer.
Who should file this form?
According to the Act, a corporation outside Canada is considered as a foreign affiliate of a resident taxpayer when the taxpayer’s equity percentage in the corporation is 1% or greater; or the equity percentages of the taxpayer and each “person” related to the taxpayer total to 10% or greater. Therefore, T1134 applies to both individuals and corporations. In this article, we will focus on the impact on individuals only.
As a result, if you own more than 1% equity interest of a foreign corporation or you and your related individuals own more than 10% of a foreign corporation, you need to file T1134. A lot of people are not sure about related people. The Income Tax Act has indicated “related” as relation by virtue of blood, marriage, common law partnership or adoption as well as situations where corporations are controlled by individuals that are related to one another. So, even you don’t own more than 1% but you and your uncle’s combined interest in a foreign corporation is more than 10%, then you are obligated for T1134.
What needs to be filed then?
There is a lot of information required by the CRA.
- book value of the shares in the foreign affiliate;
- name of the corporation;
- its country of residence;
- amounts owing to the foreign affiliate by the reporting individual and vice-versa;
- total assets of the foreign affiliate;
- net income of the foreign affiliate;
- taxes paid or payable by the foreign affiliate on account of its net income;
- whether the foreign affiliate earned any foreign accrual property income during the reporting period.
Do I have a break on filing T1134?
Yes. There are exemptions to the filing requirement on T1134. Similar as T1135, residents of Canada does not have to file T1134 on the first year when they become Canadian residents under the Income Tax Act.
And another situation is when the aggregate cost amount to its interest in ALL of the foreign affiliates of the taxpayer is less than $100,000 and the particular foreign affiliate is “dormant” during the reporting period. What is a dormant foreign affiliate? It is prescribed as the corporation that had gross receipts (including proceeds from the disposition of property and loan) of less than $25,000, and at no time in the year had assets with a total fair market value of more than $1,000,000.
What is the consequence of not filing?
The information return must be filed within 15 months of the taxpayer’s year end. There are substantial penalties for failing to complete and file this return by the due date. Penalties for late filing are set at $25 per day up to a maximum of $2,500. Tough! If you have not filed, then hurry up. And if you are not aware of this filing requirement, then find a professional to assess the situation asap.
If you need help with your T1134, contact us at 647-872-6656 and we surely can help!
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