Avoid Penalties By Keeping Up with Foreign Reporting Requirements
Did you forget to tell your CA something? If your company is a Canadian business with a foreign subsidiary or foreign assets in excess of $100,000, be sure to let your CA know so that the appropriate returns can be filed with the CRA. While these are only informational returns, they must be filed on time — and not filing can result in significant penalties.
An informational return must be filed for each foreign affiliate or subsidiary, whether it is “non-controlled” or “controlled.” For non-controlled affiliates, T1134A is a simple return outlining basic information about the reporting taxpayer, the foreign affiliate’s location and principal activity, stock value and equity percentages. Form T1134B is more complex, asking for additional details on the nature of the foreign affiliate such as income, structure, number of employees, and capital gains and losses.
These forms are due within 15 months of the end of the company’s tax year, or in the case of a partnership, the fiscal period. No forms are required to be filed for inactive or dormant foreign affiliates.
The penalty for not filing these returns is $25 per day, up to a maximum of $2,500. However, if the CRA determines that you knowingly or negligently failed to file these forms, the penalty jumps to $500 for each month the form isn’t filed, up to a maximum of 24 months or $12,000.
Foreign Investment Property
Canadian companies and individuals must also report foreign investment property with a total cost of more than $100,000 to the CRA using Form T1135. This includes money in foreign bank accounts, shares in foreign companies, interests in non-resident trusts, offshore mutual funds, real estate outside Canada, and other income-earning property.
Note that this definition does not include personal-use property like vacation homes, vehicles, jewelry, artwork and the like. Nor does it include assets used only in an active business, including inventory, equipment and buildings.
Form T1135 must be filed annually on or before the due date of your income tax return. Penalties for not filing form T1135 are similar to those for not filing T1134A and T1134B.
Non-Arm’s Length Transactions
Taxpayers are required to file T106 forms to report non-arm’s length transactions with non-residents in excess of $1 million in fair market value. Generally, “non-arm’s length” refers to transactions between related parties, and includes both related individuals and related corporate entities. The penalties for not filing are similar to those outlined above.
But if the CRA demands a turn-back that is not forthcoming, the penalty doubles to $1,000 per month up to a maximum of $24,000. And if a return is filed but it contains false statements, each taxpayer who participated in making the false statements may be subject to a $24,000 penalty.
If you haven’t discussed your foreign assets with your CA, don’t delay. It may be possible to avoid penalties under the CRA’s voluntary disclosure program, which allows taxpayers to correct inaccurate or incomplete information to comply with their legal obligations.
It’s not unusual for a taxpayer to overlook their foreign assets, especially if the value has grown substantially. But not filing can cost you a lot of money.
Our firm is familiar with foreign reporting requirements. Let us know if we can assist you or answer your questions.