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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: 1. In a case where two Canadian resident companies, Canco and Holdco held a direct ownership in a U.S. Company, USco for part of their 2023 taxation year, who needs to file a T1134 for that year; is it Canco or Holdco or both? 2. What is the equity percentage that needs to be reported under section III C (ii) of part I of form T1134 summary if USco held a 50% of the interest in a LLC on June 30th, 2022, a 100% interest on December 31, 2022, and a 0% interest on May 1st, 2023?
Position: 1. Both. 2. The equity percentage that must be reported is the one for June 30th. For tax year 2022, Canco will need to report that USco had a 50% equity percentage in LLC and in tax year 2023, both Canco and Holdco will need to report that USco had a 0% equity percentage in LLC regardless of their choice of filing jointly or separately.
Reasons: 1. Canco and Holdco must each file a T1134 in relation to their direct share ownership in USco during their 2023 taxation year. However, Canco and Holdco also have the option of jointly filing the T1134 form provided that they meet the requirements described in the instructions for filing for a group of reporting entities that are related to each other. More specifically, in order to file as a group, Canco and Holdco must be related to each other, share the same tax year end and both use either the Canadian dollar or the same functional currency. It should be noted that the transfer of the shares of USco from Canco to Holdco during the year, in the example provided, would need to be reported under section 3 B of part I of the T1134 summary for tax year 2023. 2. The equity percentage that must be reported is the one at the end of the tax year of the reporting entity or entities which is June 30th. It should be noted that the liquidation of USco would need to be reported under section 3 B of part II of the T1134 supplements for USco.
APFF FEDERAL TAX ROUNDTABLE 10 OCTOBER 2024
2024 APFF CONFERENCE
4. Filing a T1134 information return in a particular situation
Background
- Canco, a corporation resident in Canada, owned all of the issued and outstanding shares of the capital stock of USco, a corporation resident in the United States. USco held all of the shares of LLC, a U.S. resident corporation for purposes of the Income Tax Act that was transparent for U.S. tax purposes.
- On March 31, 2023, Holdco, a Canadian resident corporation, was incorporated and Canco became the sole shareholder.
- On April 30, 2023, Canco transferred all of the shares it held in the capital stock of USco to Holdco. The transfer was made pursuant to the rules set out in section 85.
- On May 1, 2023, USco was wound up into Holdco.
- Canco and Holdco both have June 30 year-ends, while USco and LLC have December 31 year-ends.
Questions to the CRA
(a) Who will be required to file a T1134 information return for the 2023 taxation year? Is it Canco or Holdco, or both?
(b) What are the equity percentages and the direct equity percentages of USco in the LLC to be reported in item (ii) of Subsection C of Section 3 of Part I of the T1134 information return if USco held 50% of the shares of the LLC on June 30, 2022, 100% of the shares of the LLC on December 31, 2022, and then none of the LLC shares on May 1, 2023?
CRA Response to Question 4(a)
For purposes of this response, it is assumed that USco and LLC were not corporations considered “inactive” for purposes of filing the T1134 information return.
Section 233.4 requires a reporting entity (a taxpayer or partnership) to file a T1134 information return in respect of each of its corporations that were foreign affiliates in its taxation year. Under paragraph 233.4(1)(a), a taxpayer who is resident in Canada and for whom a non-resident corporation is a foreign affiliate at any time in the year is a reporting entity. The characterization of a non-resident corporation as a foreign affiliate is made, for the purposes of section 233.4, in light of the definition of “equity percentage” found in subsection 95(4), paragraph (b), which was amended by paragraph 233.4(2)(a) to disregard equity percentages held in corporations resident in Canada.
As stated in the instructions for the T1134 information return, only a direct holding corporation, often the lowest-tier subsidiary of a group of Canadian corporations under common control, is required to file a T1134 information return in respect of a foreign affiliate held during the fiscal year. However, if another Canadian corporation has a direct equity percentage in the same foreign affiliate during that fiscal period, that corporation is also required to file a return in respect of that foreign affiliate.
In this case, Canco directly held all of the shares of USco for the period from July 1, 2022 to April 30, 2023, and Holdco for the period from May 1 to June 30, 2023. They therefore both had a sufficient direct equity percentage in USco and LLC, within the meaning of paragraph 95(4)(a) as amended by paragraph 233.4(2)(a), so that USco and LLC were their foreign affiliates during their taxation year ending June 30, 2023. Canco and Holdco are therefore reporting entities for purposes of filing the T1134 information return for their taxation year ending June 30, 2023. The "Questions and Answers about Form T1134" page, available on the Canada Revenue Agency's website (footnote 1), also states in the “Do you have to file a return” section that a T1134 information return must be filed for a foreign affiliate which stops being a controlled foreign affiliate before the end of the reporting taxpayer's tax year.
If Canco and Holdco meet the conditions set out in the instructions for the T1134 information return, they may designate one of them as their representative and the designated corporation may file a single T1134 information return with the required information for both. This administrative relief, described in the instructions under the “A group of reporting entities that are related to each other” section of the T1134 information return, is available to reporting entities that are part of a related group of filers, that file their tax returns in Canadian currency or in the same functional currency, and that have the same fiscal period end. The concept of a “related group” according access to the administrative measures refers to the definition in subsection 251(4) and refers to a group each member of which is related to each other member.
The transfer of USco shares to Holdco will have to be reported appropriately on the T1134 information return, in particular under Subsection B of section 3 of the summary.
CRA Response to Question 4(b)
Subsection C of Section 3 of Part I of the T1134 information return must be completed in order to provide the Canada Revenue Agency with the organizational structure of the group of corporations and partnerships that own the foreign affiliates. Alternatively, the reporting entity may provide an organizational chart of the group structure that includes the information requested therein.
As stated on the “Questions and Answers about Form T1134” page of the Canada Revenue Agency website (footnote 2), the organizational structure must be reported as it exists at the reporting taxpayer's year-end. It is also stated on this page that additional information can also be reported on a separate page attached to the form, including information on entities that are no longer part of the corporate structure at the end of the fiscal year but must still be reported.
For its fiscal period ended June 30, 2022, if Canco completes Subsection C of Part I of the T1134 information return, it will be required to indicate in item ii) that USco had a 50% equity interest in LLC, and a 50% direct equity interest in LLC.
For their fiscal period ended June 30, 2023, Canco and Holdco will have to indicate that USco had a 0% equity interest in LLC, and a 0% direct equity interest in LLC. This is the case regardless of whether Canco and Holdco each file a T1134 information return or whether a single return is filed pursuant to administrative relief for groups of related filers.
Transactions relating to the winding-up of USco must be reported in Subsection B of section 3 of Part II of the supplement filed in respect of USco.
Isabelle Sauvé
October 10, 2024
Answer prepared in collaboration with :
Darren Poiré, Senior Technical Specialist
Compliance Programs Branch
International Technical Issues Section
Amélie Guimont, Senior Technical Specialist
Compliance Programs Branch
International Technical Issues Section
FOOTNOTES
Due to the requirements of our systems, the footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, (online: https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/information-been-moved/foreign-reporting/questions-answers-about-form-t1134.html).
2 Id.
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